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- Re: Fixed index annuity with guaranteed income rid...
Fixed index annuity with guaranteed income rider
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Fixed index annuity with guaranteed income rider
Note: If you don't read the entire post, take a look at the attached links to google drive that illustrates two scenarios. 1) $750K initial investment (now) in a fixed index annuity with an income rider providing a guaranteed minimum payment of $84369 starting in 7 years. 2) Investment of $750K now earning 5% interest annually and withdraws of $84369 starting in 7 years. Notice how #2 runs out by the time I am 83 (7 yrs shy of end of plan). I need to earn >6% in the #2 scenario to make it to the end. This is just an illustration using 25% of the portfolio for the annuity. Now read on for more detail. Appreciate any comments.
https://drive.google.com/file/d/1bFFmDIuY2Y7CKYJVf-H46rFNHR2EOIPe/view?usp=sharing
https://drive.google.com/file/d/1yZiZrR60pw34rRDQJYRf6dZbNP-U1hgI/view?usp=sharing
Most of us are not fortunate enough nowadays for have a pension, and social security will not cover all of our expenses. Creating more guaranteed income (which a fixed index annuity can do with an income rider), is a way to eliminate some risk and deal with sequence of returns and bad timing. Annuities are not investments really, they are insurance policies.
I am not in any way a financial advisor. Just a dude with decent retirement savings trying to figure out how to make things work in retirement. You can talk all you want about bucket strategies, investing on your own, getting more return, but when you need to rely on that nest egg to fill a gap between Social Security and expenses, you are taking a lot of risk and may be in for some sleepless nights.
I created a simple spreadsheet for myself to cover 30 yrs in retirement for me and my spouse. Typical columns like inflation adjusted expenses (3%), medical expenses, social security at 70, savings balance, savings withdraws, taxes etc. I ran two scenarios, one with 25% of my starting portfolio used to purchase a fixed index annuity w/ income rider, and one with no annuity. The "no annuity" scenario only started to look more advantageous when I assumed an annual rate of return of 8% or higher on investment savings. Anything less than 8%, the with annuity scenario always looked better in terms of more assets at the end of plan and a lower withdraw rate from savings each year. By the way, I assumed the minimum payment withdraw from the income rider in the scenario. So, if any average investor foolishly assumes they can get 8% or higher without taking a lot of risk, and not hit bad timing and sequence of returns problems, then have at it.
That all said, I personally don't think it is ever a good idea to put all of your savings into an annuity. But, unless you are very wealthy, a portion may make sense. Shoot this down if you want to, but my spreadsheet is just simple math, it does not lie.
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@TimothyH513907 Always carefully review an annuity contract. That means to read all 80 plus pages and ask the agent questions on every item you do not understand. You will be amazed at how many questions the agent is unable to answer and may refer you to the various disclosures included in the annuity contract. The review is cumbersome and complex especially with the formula(s) that insurance companies use to credit interest on the index they are using (i.e., S&P 500,etc.). The contract may also indicate that the formula may change from year to year. So, I suggest you look at the Illustration that the agent provided and review the interest rates that the insurance company used. Do not focus on the "phantom interest rate" which is used to develop your payout amount. It is used to illustrate an annual positive growing amount (credit) and is not real money. Next, what is the policies payout percentage (i.e., 6%, 7%,etc.)? For example, if it is 6%, then your "phantom income" amount would need to grow to $1,406,150 in seven (7) years to realize a $84,369 annual payout. This is about 9% to 10% per year depending on the crediting method (i.e., simple interest, compounding, etc.). If the index crediting is earning only about 5% in real money, you are just withdrawing your initial premium faster and reducing any death benefit that may be payable. Remember, there are costs that the insurance company will deduct each year from your annuity. So, you may deplete your amount of death benefit way before the second approach reaches zero which, as I understand, does not have any insurance company costs. Lastly, most States have an Insurance Company Guaranty Association which provides some protection against insurance company failure. That amount varies from State to State. However, I recall the amount $250,000 was a common number among the States. So, there are a number of items to review in order to compare "apples to apples".
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Good points that I have considered.
1) I am not concerned about legacy, just that my spouse is paid the full amount until the end of her life, if I pass away before her. So, this does include joint survivorship.
2) Also, yes, I understand this is not inflation adjusted. But notice in the attached spreadsheets I have adjusted expenses and the plan still works.
See, that is the key to the entire discussion. The spreadsheet comparison to with annuity and without annuity is simple math based on some guaranteed income, projected expenses and different return rates. The point I am trying to make is that the annuity wins out until I start to project a rates of return of >= 8% on investments. Then it flip and the non-annuity scenario looks better. Banking on 8% seems way too high and risky for me.
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@TimothyH513907 I agree that any comparison is simple math. The insurance company has to grow your initial premium ($750 K) over the 6 or 7 year period to about $1.2 million in order to payout 7% ($84,000) per year. Your comparison indicates that the non-annuity would be about $1 million. I am rounding numbers so other readers may follow the concept. I am not sure if you are accruing interest at the end of the year and then withdrawing at the same time or the withdrawal is in the subsequent year. In other words, you are invested for 6 years and withdrawal occurs in the 7th year ( or invested for 7 years and withdrawal in the 8th year). This is a factor to consider based on the amount of your initial premium ($750 K).
At any rate, your annuity has to grow about $450,000 over (lets use) 6 years or about $75,000 per year or about 10% simple interest. As you mentioned, 8% is risky. So, 10% is even more risky. Unless this 10% is a real interest amount, it is "phantom interest' often called a "roll up". It is not real money, but is used to develop only your withdrawal amount. Keep in mind, the insurance company does not provide an income rider for free. Fees may vary from 1% to 2% of your initial premium and/or contract value. For example, split the cost to 1.5% and you will pay the insurance company $11,250 the first year ($750,000 X .015). This cost will increase if your account value increases and decrease when your account value decreases. As an alternative, have you reviewed buying an immediate annuity which is the closest annuity to a pension. Moreover, you may elect an income stream at any time. However, if you elect to wait, you will find that the optimal time to buy an annuity is in the 70 to 75 age range. You will have a better feel for your life expectancy.
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@Tonster521 wrote
Keep in mind, the insurance company does not provide an income rider for free.
========================
Wouldn’t there be (2) riders - each with a charge?
- the guaranteed income
- the spousal benefit
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@GailL1 Great question. There is definitely a cost for both. Another question is who pays for those costs? Currently, I believe most insurance companies are deducting those all of those costs from the annuity. There may be different costs within the annuity contract such as 1.5% for single and 2.0% if adding spousal coverage. Years ago, some insurance companies absorbed some of the costs in an attempt to sell their annuities. About 20 years ago, I saw the costs as low as 0.4% to 0.5% which was either a subsidized cost or incorrectly priced by the insurance company actuary. Insurance companies were clever to add language that the costs may change from year to year. This is why I suggest to folks considering an annuity to carefully read the annuity contract and ask questions regarding anything that is not clear or difficult to understand. Annuities are are good fit for some folks. However, some folks adamantly reject annuities.Thanks for the thumbs up.
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"Notice how #2 runs out by the time I am 83"
Understand that the insurance companies are banking on the average person will die by the time they reach 83. Some will die earlier, some will die later. The actuaries take all that into account when coming up with the payout rates. They aren't doing anyone any favors except themselves!
Consider a fixed index annuity with "lifetime payout" an insurance policy in case you outlive the average.
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You can buy increasing annuities that compensate for inflation. Personally, I wouldn’t buy an annuity unless I had no one to leave an inheritance. But that’s just me. I have a good pension and so not dependent on earnings from my retirement savings.
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