First of all, there are a lot of people that think annuities are only for income. Longtime subscribers to AST know that’s not the case but for anyone new it is an important point to understand. Annuities are meant for protection and each type offers an opportunity to achieve any goal.
Why is it important? Because knowing that annuities can be used for several purposes will likely uncover some extremely efficient retirement strategies. That’s what I am going to show you today.
I met Mark a few weeks ago and he needs to make a decision by the end of July. He’s got some money coming in from selling real estate and wants to use the proceeds to purchase an annuity for guaranteed lifetime income. He already has some annuities and likes how they have performed but doesn’t need the income for another five years.
When we first talked he said that his current annuities would already pay him more than he needs for steady retirement income and this one would just be extra cash flow. In short, he doesn’t really need it but wants it anyway.
That’s a typical case of someone who wants to budget for discretionary spending and this exact scenario is how I came up with these ideas. I have many clients who are actually spending less in retirement than they initially thought. Or spending fluctuates from year to year and a flexible plan is more appropriate.
To illustrate this, I like to tell people the story of myself in 2018. My wife needed a new car and I never wanted to shovel snow again so I bought a four-wheeler and put a plow on it. The point is that I spent more money that year than I do every year because of large purchases that don’t happen all the time. I think that’s similar to what many will face in retirement.
Mark doesn’t need extra income, he just wants it. I could just sell him a product but I took the opportunity to show him a more lucrative strategy where he would have control over the outcome.
Details: He and his wife are 63 years old.
He wants to put $500K into an annuity and take joint lifetime income in five years
Best deal available, considering all factors, was around $34K per year
Guaranteed monthly checks that exceed his need for income
So what’s he going to do with the extra income? Probably put the money in the bank and earn no interest.
This is important for everyone to understand. If you’re not spending money you should be growing money. Income and accumulation can be done at the same time. Where you accumulate money is your choice. Banks don’t pay interest and the stock market is risky.
I’m here to talk about what an annuity can do.
I ran an illustration for a deferred annuity that is built for accumulation and showed it to Mark. To be on the safe side I ran some very conservative numbers. He could take the same amount of income ($34K) and if he only earned 3.78% would have almost $350K left in the account after 20 years.
Now tell me, is there a better way to create income, avoid volatility, plan for inflation, have control over your money and leave a legacy all at the same time? I’ll take your suggestions. Perhaps Ken Fisher would like to come on the podcast and debate me.
It’s not always about the highest yield, although this annuity has potential to earn much more interest which would only create an even better result.
The highest illustrated index the contract shows more than 10% average with a remainder of more than $1.8M after 20 years.
What does he get out of this?
Discretionary access to income – could be more or less than desired. It’s his choice.
Protection from market volatility – with no fees!
A substantial remainder that would offer true inflation protection
Control of the money with opportunity to reposition assets in the future. He doesn’t have to own the annuity for the rest of his life.
If money remains in the account this offers the best chance to leave an inheritance while also doing all of the above.
The five keys of retirement is the lesson here and planning for those in the most efficient way possible is the goal. Annuities are simple and can be used effectively for many different objectives. Income, deferred growth, laddering, reinvestment and diversification are all the results of using an annuity the right way. You tell me what you want to see…