Case Study: Which Income Option Would You Choose?
This is an interesting case where it would work out either way. I proposed an alternative simply because the other advisor didn’t. Each option has benefits and risks so it’s a clear example of why you need to have at least two options to compare. This couple didn’t have that but now they do. When they make a final decision it will be with much more confidence. If that’s all I get out of it then I consider it a win. This only takes into account what they plan to put into annuities and not the additional assets in their portfolio.
Here’s the current plan with the additional proposal…
They have $600K in MYGAs with four years left. 6.7% interest rate produces $40,200 annual income that is used to meet necessary expenses. $400K additional in IRA assets will go into an annuity and deferred fixed indexed annuity was recommended. Since the yield on a FIA will vary, it’s best to use the going MYGA rates of today for comparison purposes.
This leaves them to figure out how to produce $40,200 annual income when the MYGA is out of surrender. If rates are the same then just keep doing the same thing. If rates drop then income has to be cut unless they dip into principal or rely on additional withdrawals from the IRA annuity. RMDs will be due in six years so some withdrawals from the IRA will be necessary.
Since MYGA rates are much lower already, they can’t expect to simply replace the interest withdrawals unless rates increase.
An alternative is to use the IRA funds to purchase a deferred income annuity now that pays $40,200 annually for life. Then the MYGA can just be rolled and accumulated over time at the highest rate available in four years. Is this the right choice? Let’s run the numbers and find out.
After four years the MYGA is worth $600K. The additional $400k will have grown at that time to $495K using the prevailing top MYGA rate of today at 5.5%. From there, the $1.095M will presumably grow at the same 5.5% but $40,200 needs to be withdrawn annually. After 20 years total, the remaining value of the account will be $1,570,702 after all income payments were made.
Alternatively, what happens if they buy deferred income today instead of another MYGA or FIA? The deferred income costs $390K today and produces $40,200 joint lifetime income. After four years the income is turned on and the MYGA reinvested to the tune of $610K since we saved a bit on the deferred income purchase. After 20 years at 5.5% we can project a remaining cash value of $1,436,710. Clearly it’s not as lucrative but there’s more to it.
Sticking with the MYGA strategy comes with risk of yield in the future. It could be better or worse than what is available now. If rates are higher then they win but if lower it won’t work out as well. There is also an issue with RMDs so the strategy would have to be switched somewhat but that’s probably not a material disadvantage. Either way, there is more than enough money to produce income so the final decision will include elements of both convenience and accumulation.
But then there’s the question of what’s easiest. Sticking with the MYGA strategy will be fine but there’s a risk of what interest rates will be in the future. Also, going that route might have you cycling annuities every five years or so and there may come a time when you don’t want to do that anymore. I’ve said for years that one of the great advantages of short term strategy is that it can change and there will always come a time when guaranteed income makes sense. With higher rates today, the advantage of either strategy is a coin toss.
For these guys, the benefits of buying deferred income now will make life a lot easier, and depending on what rates do in the future, might end up being more profitable as well.
In this case, deferred guaranteed lifetime income will…
Create consistent cash flow with no need to readjust the plan
Automatically eliminate concern for required minimum distributions
Significantly reduce risk associated with interest rate fluctuations
So, would you want variable returns and interest rate risk? Or, do you want a guarantee that basically gets you everything you want. It’s a personal decision and my guess is that a poll would reveal a 50/50 split. Simplicity should be a part of every retirement plan but adding risk or complexity is a choice that some will make. In a case like this where it can be done either way there is no one who can tell you what to do. All you need is someone who will give you options so that the final decision is made with confidence. Get in touch with me if you want the same type of analysis.
Bryan
Watch Episode 172: Which Annuity Income Option Would You Choose?
Download Episode 172: Which Annuity Income Option Would You Choose? on apple podcast
Last Updated on March 14, 2025 by Bryan Anderson
