Weighing the Risks: Lifetime Income Annuity vs. Short-Term Solution

Almost all of what I do for people on a daily basis is pretty simple. To use what I have learned throughout my career, in every case, I try to put myself in your shoes and decide what I would do if it were my retirement. I know the products and the rules, the pros and cons of each strategy but it does little good if I can’t apply that to your goals. A lot of people ask about my own retirement plans but that doesn’t do you any good because our variables are all different. I have to give thoughtful consideration to all the variables and decide what I would do in the same position as you.

Putting My 20 Years of Retirement Planning Experience to Work for You

Because I can’t hit anyone 100% this means that I typically narrow everything down to a couple of options. The final details are up to you which is the way it should be. But the point is to compress time for you so you don’t need a doctorate in retirement planning to figure it out. You may as well put my 20 years of experience to good use. Trust is the only thing missing from that but we develop it over time.

A Case Study: Joint Annuity Income Options for a Retiring Couple

A new case popped up last week that gives me the opportunity to go into more detail on some elements of a recent podcast (Annuity Income Options, March 11, 2023). We have different inputs in this case because it’s a joint payment instead of single and this couple is a different age and has different assets and income needs. There is no plug and play solution for everyone and that’s why the guys who only sell a couple products are no better than clowns in a circus.

I’m going to keep the details really basic. Anonymity is important in the financial business and your details are different anyway so there’s no need for you to understand every last piece of it. This couple is going to retire within two years and they are almost exactly the same age, which makes things pretty easy from a mathematical standpoint. They have $400K to set aside to generate income. Cash flow needs and market uncertainty make an annuity a pretty good choice.

I’ve said a thousand times that it’s incredibly easy to find the highest level of guaranteed income. I pay for access to the database so you don’t have to. If your goals are clear then we can find the best product in a matter of minutes.

Eliminating Unsuitable Options

If you look at the previous podcast from last month, there are four general ways to use annuities to generate income in retirement. Personal situation is likely to eliminate at least one of those and that holds true in this case. This couple is waiting more than a year to retire, so a single premium immediate annuity will not work because those contracts require payments to start within one year. I’ve only had one meeting with these guys so I’m going to summarize all the considerations that need to be made before the right choice is made.

Maximizing Cash Flow with Guaranteed Income Contracts

The easy way to do this is to maximize cash flow with a guaranteed income contract. In this case, the $400K would produce roughly $30,000 annually if they waited two years to take income. The top A+ company is Protective Life and it’s an indexed annuity with all the other supposed benefits with residual cash value and potential death benefits. The purpose of this post is not to go into all those details so I’ll leave it at that. With these guys being fairly young, the payout is healthy enough that they will recover all money spent and be in the insurance companies pocket several years before average life expectancy. Thank better interest rates for that because we wouldn’t have been able to do that a couple years ago.

Addressing Common Misconceptions

This is the point where most people look at it like they are sending money away and will never see it again. To the contrary, the money is just in a different place and it insures a completely different type of asset. Cash flow is every bit as, if not more valuable than money sitting in the bank. You take money out of your paycheck while you’re working so that you can take that money and buy a paycheck when you no longer get one. Regardless, that’s the reason why I spent so much time figuring out different ways of doing it.

Exploring Alternative Annuity Options for Greater Financial Control

The alternative here is to take the same amount of money and try to match the highest annuity payout elsewhere. Because they are nervous about the market, along with every reason you can think of, an annuity is also the best choice for this. This allows the couple to maintain more control over the asset by using a deferred annuity and simply taking the same amount of cash flow using the annual free withdrawal provision. 10% free withdrawal is available annually and the $30K income would be well within that.

Comparing Fixed Annuities

To keep it simple and as guaranteed as possible we’re going to use a multi-year fixed annuity for comparison. We could project better results with an indexed annuity but it’s not guaranteed and in this case, I don’t feel it appropriate if the couple doesn’t want to lock up the paycheck for life. The same $400K goes in and they wait two years. Retirement comes and they start taking monthly payments equal to $30K annually. A five-year fixed annuity pays about 5.25% so when it comes surrender free, they would have covered three years of retirement income and there would still be about $419K left in the account. They maintain the asset but have to figure out how to keep doing the same thing in just five years.

Assessing Future Rate Uncertainty

That’s the risk. Will rates be good enough to continue going down the same path with control over the asset throughout retirement? My opinion is that it’s not worth taking the risk. We haven’t seen rates this high in almost 15 years and the global economy carries a lot of risk right now. I wouldn’t bank on it. The five-year annuity was his idea because he wants to be as flexible as possible but in this case, I’d suggest a longer-term fixed annuity if this is the chosen path. It’s not about higher interest rates as much as it’s about locking in the guarantee for a longer term.

Deciding Who Bears the Risk

If they choose a five-year annuity instead of a lifetime guarantee with a lifetime income annuity, then they are choosing to carry the risk rather than transferring it to an insurance company. You can do it any way you want but I’m going to document the analysis. What better way to do it than with something published. 

Preparing for the Unknown: The Importance of a Personalized Retirement Strategy

Every retirement situation is unique and requires careful consideration of various factors, such as financial goals, risk tolerance, and personal circumstances. If you have any questions or want me to do this type of analysis for you, then give me a call or make an appointment.

Podcast about Weighing the Risks: Lifetime Income Annuity vs. Short-Term Solution

What You’ll Learn from This Episode:

[2:34] Annuity Income: Asset Value

[6:37] Laying Out Annuity Options

[8:08] Joint Payments vs. Single Payments

[14:59] There’s a value to having the income

[15:53] Cash Flow is a calculation to see which one is more valuable

[17:54] We can project better results with an index annuity, but it’s not guaranteed

[19:38] Difference between guaranteed income and discretionary income

Key Quotes: [9:49] “It’s effortless to find the highest level of guaranteed income.”


Weighing the Risks: Lifetime Income Annuity vs. Short-Term Solution

Last Updated on February 6, 2024 by Bryan Anderson