Case Study Update: Annuities at Work

One year ago I wrote a quick story about Bill. Let me retell it to show you annuities at work. We had been working together for about a year after he called asking for help with a retirement plan. Initially, he was looking for guaranteed income and came with a long list of requests regarding benefits and company ratings. I came back to the second meeting with the best contract on the market only to find Bill had decided he needed more income than he had previously thought.

This illustrates the problem with guaranteed income. As great as it is, in many cases it’s pretty expensive and takes more money to secure than most people are willing to spend. I mean, the mathematical models and academic research based on historical numbers have all proved that the security from guaranteed income provides the highest level of growth to offset inflation and leave a legacy, but most people still don’t buy it.

When Bill’s income needs increased so did the amount of premium required to make it work. In his case, it would have meant 2/3 of his portfolio, whereas previously he was expecting to be able to do it for half.  So I showed him the Flex Strategy and why it would likely be a more efficient way to provide the security needed.

I’m not going to go through all that again so if you’d like to go back a year and read the basics of Bill’s story you can read it here: Why I Call It the Flex Strategy

The result was a plan that met his expectations for both cost and benefit.  We are two years later and we each got a renewal letter in early February. When we spoke I asked if Bill wanted to make any withdrawals from the annuity. He said that because his equities were up so much in value he had already decided to sell off some gains and bank the cash to cover his income for the next year. His annuity credited a solid yield as well so things were right on track.

A couple weeks later, all hell broke loose and I don’t need to remind anyone what happened. I called Bill and told him that with all the market losses his portfolio was way out of balance and he still had a 10% free withdrawal that could be accessed if he wanted to pursue more growth after the decline. So he did it and bought back all the securities he sold at a 30% discount. Poetry in motion…

Now, it will not always happen this perfectly but then again, free withdrawals can be taken at any time during the year. I’ve been seeding the idea for reinvestment of additional cash for the past year now and if any of you get the chance to do it two or three times in retirement it will make a phenomenal difference in portfolio values in the long run.

Timing the market is difficult and every professional trader will have an opinion one way or the other on the subject. But it’s clear to me that if you make 30% or lose 30% you ought to think about making a move.

Bill never did anything besides replace the bonds in his portfolio. I’ve been banging that drum for more than ten years and it might be time to get a bullhorn and start shouting! Why does everyone hang on to an asset with almost no upside?

You made some money and lost some money. The market’s coming back but will it last? You don’t have to do anything crazy but you should do something. I told you all a few weeks ago so go look at it again if you need a reminder. Don’t sell stocks. Do this instead.


Further readings

Fixed Indexed Annuity Guide

Fixed Indexed Annuity Withdrawals

How Much Do Fixed Annuities Pay?

Last Updated on January 10, 2024 by Bryan Anderson