The Highest Annuity Payout
This is a case that comes from my podcast co-host, Ashok Ramji. And it’s important to understand that the highest payout with an annuity is not always the first choice for many people. It’s one thing to not realize you didn’t get the highest payout contract and another to choose a lower payout for different reasons.
Ashok has a client, Mary, who is in her early 70s. She is generally comfortable with market volatility and aside from having 15% of her assets in fixed deferred annuities, has an aggressive mix of cash, bond funds and equity mutual funds. Bond funds along with dividend paying stocks produced income for Mary but market volatility affects bonds as well. She was a little uncomfortable with the lack of upside growth potential on the bonds and thought it would be best to replace those with another income producing asset.
There’s really only one way to reduce volatility while producing income at the same time. Ashok was correct to take Mary in the direction of an annuity with a guaranteed lifetime withdrawal benefit. This is where we show you that our goal is to solve problems for people and we do the work so you don’t have to worry about doing research.
Mary’s bond funds are actually quite good, paying 4%, which gave here around $7600 per year on an asset with a value of $192,000. With rates remaining low, Mary was concerned about payments decreasing at some point but if rates rise the underlying value of the asset would drop. There are ways to work with a bond fund to find a happy medium but it’s not something that everyone wants to sit and watch during retirement.
Everything was pre-tax because her money is in an IRA so the tax comparison is identical no matter what asset she holds. It was a simple process to see if there was a better deal that gave her a little more peace of mind. Her goal is steady consistent income because fixed deferred annuities and dividend paying stocks would provide a residual value for legacy.
Here is what the search revealed: Below is listed the top four payouts for this example. The original premium is $192,000 and a couple of products have a bonus while two others simply have higher payout rates.
You may at first notice something we pointed out in the podcast and in the newsletter a few weeks ago. The best deal for guaranteed lifetime income is unique for each person or situation. What works for you may not be the best option for someone two years younger or another person who wants to defer income for a certain number of years. One has a big bonus and another has a much higher payout rate but both come dang close to producing the same amount of income.
As you can see, in any case Mary will be able to increase her income if she trades bond funds for an annuity. The top three contracts are not separated by much but the fourth one from Midland National is a fair bit lower. But there’s something about it that may appeal to certain people.
The Midland contract is the only one that provides income without fees, meaning it will leave a higher residual value when passed to the next generation. It’s not the only one available but it was the highest paying option for this scenario.
Below I’m showing you cumulative income after ten years, total fees to date and the remaining account value, assuming no interest earnings. Remember that this will put Mary in her early 80s so it’s a good basis for lifetime comparison.
In the top three contracts, cumulative income along with fees drain the account value much faster than a contract with lower payout and no fees. I’ve been a big proponent of eliminating fees for a long time so it shouldn’t surprise anyone that I favor the expense-free contract. After all, it’s nothing but a matter of you deciding how you want to get your money back.
What’s interesting is that there is only one option to guarantee that you will get back every penny you put in the contract from the beginning. I’ll show you another table that adds the cumulative income to fees and subtracts it from the initial investment to show what the remaining value would be.
The Midland contract is the only one that guarantees you or your heirs will, at the very least, get back every penny you put into the contract. Some may choose to go with the highest payout so I’m not sitting here just trying to push Midland. The idea is that it takes detailed analysis in every case to make sure the consumer gets exactly what he/she wants.
Now, obviously, each of the contracts will have a residual value that grows so the remainder in every one of the above is likely to be much higher. That only gives us another variable to consider. Remember, Mary was looking for more steady and predictable income and each of the above options gives her no less than 25% more income than she already has today. From there it’s nothing but a matter of personal preference to decide which option is the most appropriate.
I believe Mary is choosing to take the Midland contract but I don’t know for sure because it’s not my case. She apparently like the idea of not paying fees, which gave her a better chance of leaving residual value to her heirs. It’s not always about the highest income payout but you should have the information that lead to making the right choice. That’s what we do every single time. If you want a personal analysis then get in touch. I’ll be in the office Monday morning.
Enjoy your weekend while I’m out scouting for elk!
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