AST Flex Strategy in 2023
Well, now it’s published. Since Kerry Pechter added a section about the AST Flex Strategy in the second edition of Annuities for Dummies, it seems a good time to give everyone an update to see how it works with products today. The strategy started out as an alternative to guaranteed income annuities when rates were really low. Lots of people ask how my recommendations have changed. I am selling more income annuities than ever before but I still use the Flex Strategy concept to verify the best approach.
In short, my advice hasn’t changed. Seek the best deal you can get that aligns with your expectations and retirement goals. We all have better products at our disposal now and that only means that you have more options that will get the job done. Payouts are higher on income contracts and yields are higher on accumulation contracts. For those who want more control over assets and the option to change strategy over time, the Flex Strategy is still quite powerful.
I’m going to update the webinar soon. Many of you have seen it and lots of people over time have adopted the strategy for retirement. One marketing company even stole the idea and claimed that several producers had been very successful using it. If anyone shows you the idea without giving me credit is phony. There is no doubt that I created this strategy on my own more than a dozen years ago. It is the product of all academic research done by other people and molded into a strategy with real-world application.
I had a good opportunity last week to use my spreadsheet to help someone figure out how best to use annuities in retirement. This guy has sold his business and wants to retire in one year. He is 55 years old, has saved well and wants to enjoy a stress free retirement. A couple other people gave him the standard guaranteed lifetime income pitch, but nobody gave him the justification for using an annuity. He was skeptical when we first spoke so I had to hope he was patient enough to learn things that no one else would teach him. I decided to use the spreadsheet.
I did it live when I showed it to him, which means I didn’t know what results it would give me. It’s proof that I don’t have an agenda and just want to help people out. Let me give you the basic parameters of the case. I’ll show the sheet in the podcast and give the basic results here.
Full Retirement at age 56
Current Assets $1,750,000
Additional funds from sale of business $1,000,000 due in one year
$80K income need from age 59 ½ for life
Inherited IRA funds first three years of retirement
Those who have followed me for a while might know that my first thought is calculating his income needs in relation to total assets. Including the sale of the business, annual income needs are 2.9% of his portfolio. It’s definitely a case where he doesn’t need an annuity but that doesn’t mean an annuity won’t make things better. We run three scenarios to see which is best, using the worst 20 years in the stock market and the past 20 that resulted in phenomenal growth. The bad market scenario shows whether the portfolio would survive and the positive growth scenario shows how much you would be leaving on the table by using an annuity.
- All stock market – Simulated using an S&P 500 index fund, this would provide full upside growth potential and all the risk that comes with it. Reverse dollar cost averaging is what makes this difficult.
- Income Annuity- $80K annually starting in four years would cost roughly $900K today. Guaranteed income for life takes a tremendous amount of pressure from the investment portfolio but this also leaves fewer assets available for long term growth.
- Flex Strategy- Use fixed deferred annuity paying 5.25% interest for ten years. Income can be taken on a discretionary basis to replicate an income annuity but the owner retains much more control over the asset.
We ran each of these scenarios to see how much the portfolio would be worth in 20 years. To cover all bases, I also added 3% annual inflation adjustment to the income. Each of the three scenarios will provide the exact same amount of income. There are two issues that need to be addressed. In the first scenario with 100% in the market, no management fees were used. If an investment manager were to tack on a fee, the results would turn out much worse. In the Flex Strategy scenario, we ran the numbers over 20 years but can only guarantee the fixed rate for ten years so some reinvestment risk is present with this strategy.
The results are shown in the table below.
|Worst 20||Last 20|
Using an annuity undoubtedly improves portfolio performance throughout retirement. In the worst case scenario, there is a dramatic increase in net worth using either strategy with an annuity. In the past 20 years, all results are more or less the same proving that an annuity does not diminish growth opportunities. Then which is the best strategy? Of course it depends entirely on what type of benefits are most important to you.
We can analyze these results in several different ways and go deep into the details of interest rates to explain how the different annuity options work. Some may even use an indexed annuity with the Flex Strategy if more growth potential in the annuity is desired. In this case it’s worth noting that this guy is relatively young so planning for 20 years only takes him to the mid 70s but in no scenario above is he in danger of running out of money. On paper, the income annuity is probably the best strategy because it will continue paying the income and that is not reflected properly by looking only at the ending portfolio balance.
It really does come down to personal preference. In this case my advice was for him to use the Flex Strategy, because the $80K he “needs” annually is not really a need. That’s a topline estimation of what he might spend in a year. We can consider it discretionary income because there are plenty of years when he probably won’t spend that much. With the Flex Strategy a person can increase or decrease planned withdrawals at any time so if $80K isn’t spent it will leave a larger remainder behind.
The Flex Strategy is still and always has been about control over the money while meeting every retirement goal and obligation along the way. If you want to learn about the various options you have and the benefits of doing so then you’ve come to the right place.
Set up an appointment using the link at the top right corner and we’ll get after it…