Case Study: Annuity Income Options

Cases like the one I’m about to share have come up a lot in the past year.  Higher interest rates mean better deals, of course, and also a wider variety of annuity income options. For those looking for retirement income it can seem daunting but you really should consider all options just to make sure you’re getting the best deal.  The guy who brought me this case is covering all his bases and it’s a good example of how many ways there are now to get the job done.

Him:  So, I guess I am looking for an immediate, single lifetime payment, high return with low to no fees or charges. 

Me:  The only thing on your wish list I can’t deliver is the fully vested bonus.  Those don’t exist on income products.  There are also surrender fees on any annuity you’ll get so that’s going to be a sticking point for you.  If you may surrender the contract in just a few years then you shouldn’t get an annuity.  If guaranteed income is the goal then it doesn’t matter.

Before anyone else asks me to do the same thing for them, I need to make sure that you all know a specific goal is the best place to start.  Some people come to me and say they need an exact amount of income.  Then it’s easy to calculate the amount of money needed to produce the income.  The opposite of that is to have a specific amount of money you want to protect. In this case there are more options depending on what that person wants the money to do.   In this case we are going to look at getting the most out of a $700,000 initial investment for a dude that’s 65 years old.

Single Premium Immediate Annuity with Installment Refund

This is the highest income payment available with 7.8% payout, or $54,672 annually.  It also guarantees that you or your heirs will get all your money back in the worst case scenario.  Several different beneficiary options are available that provide an even better guarantee but the income payout will drop.  For instance, life with 20 years certain pays out 7.2% annual income for life or 20 years, whichever is longer.  This means the minimum guarantee is 144% of the initial premium.  That’s a pretty strong guarantee and no other product comes close.

Fixed Indexed Annuity w/ Fee-Based Guaranteed Lifetime Income Rider

These are popular because you get guaranteed income and a residual value that can be managed over time.  The best product in this class pays about 7.2% of the initial premium.  If the cash value grows over time, there can be a fairly good sized remainder for your beneficiaries.  But, it’s not guaranteed and the income payout along with fees make for a steep climb if you want to leave money to the next generation. 

The remainder cash value gives people a sense of control but the cash is held hostage by the income payments.  Additional withdrawals are available but will proportionally decrease the guaranteed income payments.  Taking free withdrawals in excess of the income payments is not the best way to use one of these contracts.  In cases where someone wants to defer for a few years this will likely offer the highest payout.

Fixed indexed Annuity w/ Free Income Rider

Just like I talked about last week, a free income rider does give you more control over your money but you get less income in exchange.  This option has a 6.25% payout in this case so it’s a meaningful drop but it provides much more control over the asset and much better potential to leave assets to beneficiaries.  This would be a good option for anyone who doesn’t need to maximize income and would prefer to manage the contract for remainder value.  Growth potential is going to be higher with these contracts and it still comes with a fair bit of guaranteed income.

Flex Strategy Using Deferred Fixed or Fixed Indexed Annuity

This is just a reminder that annuities are not just for income.  This strategy is best for anyone who does not want to make a lifetime commitment but still wants to protect the asset and take income from it.  Use the free withdrawal provision to simulate income payments and simply draw the asset down over time.  The people I know who like this use the account mostly for discretionary income so the amount of withdrawals will fluctuate from year to year.  The idea is maximum control with maximum growth potential.  

Let’s use a fixed annuity earning 5% as an example in this case.  If you take a ten year contract and pull $4200 per month out, there will be about $535K remaining in the account.  But then you are ten years down the road and have to figure out what to do next.  Some people don’t like facing that and others like the flexibility.  The key is that you can guarantee it with a fixed annuity or shoot for more with an indexed annuity.  Good performance will see you exceeding the top level guaranteed contracts and you have full control over the asset.

I can’t stress enough how important it is to settle on a strategy before looking at products.  Most people have a contract thrown in front of them and that gets them started digging through contract specifics to try to figure it out.  Then they think that they need to look at a lot of contracts and it all becomes a jumbled mess.  You should be able to look at the four options above and determine first which is the best path to choose.  Then you only have to look at one or two contracts to pick the one you like best.

Some people who end up taking the more complicated path just give up and end up missing out on the risk reduction and peace of mind that annuities provide. I suggest you take the second path and find someone who can talk about solutions well before pitching you a product. If you can’t find anyone else that knows how to do it then give me a call.

Podcast about Case Study: Annuity Income Options

What You’ll Learn from This Episode:

[2:29] Choosing the right strategies for purchasing annuities.

[4:42] Starting with a specific goal is the most effective approach

[5:37] Analyzing a case study and breaking down options

[6:16] Only consider annuities if you are genuinely interested in purchasing one

[7:22] Numerous beneficiary options are available, offering even stronger guarantees

[13:45] Examining the four fee options

[15:11] Benefits of the “FLEX strategy”

Key Quotes: 

[2:55] “An annuity is a safe and stable asset, and currently one of the best options available.”


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Last Updated on February 6, 2024 by Bryan Anderson