Guaranteed Lifetime Income Benefits for Fixed Index Annuities in Retirement

A video and vlog by Oak Harvest Insurance Services, LLC

Guaranteed lifetime income is one of the most discussed features of fixed indexed annuities, especially for retirees who want predictable income that is not directly tied to stock market performance. In this transcript, Troy Sharpe explains how guaranteed lifetime income riders work, why longevity and healthcare costs matter in retirement planning, how deferred income annuities compare with immediate annuities, and what questions retirees should ask before choosing an annuity strategy.

Quick Answer: Guaranteed lifetime income is a retirement income strategy designed to provide a predictable paycheck for life, often through an annuity income rider. It may help retirees reduce market-related income uncertainty, protect against longevity risk, and create a stable income stream alongside Social Security, investments, pensions, or other assets.

Key Takeaways

• Guaranteed lifetime income strategies are designed to provide income for as long as you, and potentially your spouse, are alive.
• Fixed indexed annuities with income riders may help separate retirement income from stock market performance.
• The income account value and distribution rate both matter when calculating guaranteed lifetime income.
• A higher guaranteed growth rate is not automatically better if the distribution rate or contract terms are less favorable.
• Rider fees may reduce the accumulation value, which can affect the amount left to beneficiaries, even if they do not reduce the guaranteed lifetime income calculation.
• Deferred income annuities and immediate annuities serve different purposes and should be compared within the context of a full retirement plan.
• These tools are generally positioned as a complement to an investment portfolio, not a full replacement for stocks or long-term growth assets.
• Strategies like increasing income annuities, stacking contracts, and Roth conversions may offer additional planning flexibility depending on the retiree’s goals.

Who This Topic Is For

This article may be useful for people who are:

• Approaching retirement and worried about outliving their money
• Comparing annuities, pensions, Social Security, and investment income
• Looking for ways to create predictable retirement income
• Trying to understand fixed indexed annuities with income riders
• Concerned about healthcare, long-term care, or market volatility in retirement

Strategy	Main Purpose	Potential Benefit	Key Trade-Off
Fixed indexed annuity with income rider	Future guaranteed income	Predictable income later in retirement	Fees, complexity, and limited liquidity
Single premium immediate annuity	Immediate income	Income can begin quickly	Less flexibility and potentially limited death benefit
Investment portfolio withdrawals	Flexible retirement income	Growth potential and liquidity	Income depends on market performance
Social Security	Foundational retirement income	Inflation-adjusted lifetime income	Benefit amount depends on claiming age and earnings history
Pension	Employer-based lifetime income	Stable paycheck in retirement	Not available to many workers today

Transcript

Troy Sharpe: Do you have enough? Can you retire? How long will your money last, and if something happens to you will your family be okay? These are the big questions that millions of people just like you struggle with leading into retirement and even in retirement. Continuing along with our annuity series, we’re going to talk about the guaranteed lifetime income feature to these financial planning tools. You’re going to understand the pros, the cons, the questions you need to ask, and you’re going to be more educated to make better decisions and understand if this financial tool could be a part of your overall retirement strategy.

Troy Sharpe: Hi, I’m Troy Sharpe, CEO of Oak Harvest Financial Group, certified financial planner, professional host to The Retirement Income Show, and also a certified tax specialist. I’m really excited about today’s video because we’re starting to get into the meat and potatoes of what can make these contracts so powerful. In the previous two, we talked about the accumulation potential or the growth engine of the fixed indexed annuity, but millions of people don’t buy it necessarily for the growth potential, they buy it for the guaranteed lifetime income features.

When you look at all the products that are on the marketplace, there are some very simple and key things to understand to help identify which products work best for your particular situation. Now, there’s a caveat here. Rates are constantly changing. Almost every single month, we get different companies that offer more income versus others. Today, again, it’s a primer, it’s meant to be educational, and help you understand the pros, the cons, what you need to know so you can ask good questions when shopping for guaranteed lifetime income strategies as a part of your overall retirement plan.

Why Should You Consider?

First, I want to lay some groundwork. I want to look at why guaranteed lifetime income can be attractive for many people in the country. We all know that we’re living longer. Now this white paper, which we’re going to have a link in the description, which you’ll be able to go through was put together a couple of years ago. First and foremost, I want to talk about life expectancy. On average, men who have reached age 65, can expect to live until age 84.3, while females who have reached age 65 live an average of 86.7 years.

Now, when we talk about averages, we have to take into account that this does take into consideration people that are still smoking, people that necessarily don’t work out or eat healthy and may pass away at 67, 70, 72. If you’re healthy and take care of yourself, you don’t smoke, you don’t drink a ton, there’s a good chance that you will live past these ages. We’re living longer as a society. If you look here, about 25% of today’s 65-year-olds will live past age 90, and about 10% will live past age 95. Just today on the way in to record this video, I was walking out of the building and a client was walking in.

I hadn’t met him before but he said, “Troy, I want to introduce myself.” The first thing he tells me was that his mother had just passed away last week and she was 100 years old. A coincidence that I’m doing this video today, but he tells me that she had dementia and she was struggling for some time but she was very lucid at times. What he experienced was it was somewhat of a financial drain on his family because they had to pay for resources that she needed, people to help keep up the house, people to help take care of her. Not to mention she had increased medical expenses because of her condition.

That’s one of the aspects of why guaranteed lifetime income can be attractive for some people. I love this first sentence here. Living longer doesn’t necessarily mean we’re living better. Truth of the matter is if we do live longer than those averages, we may not have the highest quality of life, but it doesn’t mean we don’t need money, we don’t need income. Matter of fact, health care is a larger and larger part of the overall budget as we age. Fidelity did a study in 2018 that a retired couple age 65 may need approximately $280,000 to cover healthcare expenses.

That includes co-pays, deductibles, insurance premiums, out-of-pocket costs. It does not include long-term care costs. In 1960, the average person spent only $146 annually on healthcare. In 2016, that number was $10,345 adjusted for inflation. That’s nine times higher than they were in 1960. Healthcare is one of the expenditures that in every other part of society technology typically leads to lower costs. Think about big-screen televisions, they used to be huge, they used to cost a ton, now they’re much smaller, much more powerful, and they’re much, much cheaper.

Technology in the healthcare industry extends our lives and believe it or not, even if we’re healthy the longer we live, the more we spend on healthcare expenses. Underneath this quote right here, it says healthcare is the only civil system where new technology makes prices go up instead of going down. Think about technology in electronics for example, big screen televisions. They used to be huge, they used to cost a ton of money. Now you can get them relatively smaller and flat screen and they’re much more inexpensive.

What technology does in the healthcare industry is it extends our lives, and even though you’re healthy, because you’re living a longer life, typically healthier people tend to spend more in healthcare because they have such extended longevity. Before we get into today’s video, just a couple quick stats on long-term care. On average, 52% of Americans turning 65 will need long-term care. 46% of them will be men and 57.5% of them will be women. Now, Genworth did a study in 2017 that the median cost can range from $45,000 to $97,000 per year. These are just median numbers.

Your particular situation matters. Many of you may know my story with my grandparents, and so what got me into the retirement planning industry. After I finished college, my grandfather had two aortic aneurysms. My grandparents raised me for those that don’t know and had to be airlifted from where they retired in Murphy, North Carolina to Chattanooga, Tennessee to perform surgery. It was overnight process. It was a nine hour procedure. Survival rate was 50%, but he survived, but he suffered hypoxia in the brain which- essentially a lack of oxygen during the surgery and when he awoke, he had symptoms quite similar to a stroke victim. We had to go through speech therapy.

We had to do physical therapy because his arms, legs atrophied. He had a bed sore on his coccyx back here about the size of a half dollar. You could actually see the spine. We had to go to a nursing home, was $10,000 a month for several months. Then we had to bring him home for home healthcare and that was $40,000 a month. That was two nurses in 12 hour shifts working 24 hours a day and that went on for six months for my grandparents. I’ll never forget, I asked my grandmother if she had a plan, if what the advisor was doing, what the plan was because I was concerned about her running out of money.

She said, “Troy, I don’t care how much money it takes as long as we do what we can to get him better.” That was my first real lesson that when it comes to medical expenses, especially if you’re taking care of someone, if you’re a caregiver for someone you love, you don’t care how much money it takes. You just want that person better, and I’ve seen that in my career play out many different times over the years. A few years ago, there was a study done by Allianz Life Insurance Company and the study results were 75% of people, three out of four retirees, their biggest fear was not dying, it was running out of money while living. Healthcare costs do play a large role into that fear.

Income for Retirement

Today’s video is going to talk about guaranteed lifetime income strategies. Part of the benefit of these tools is not necessarily what they do, it’s the peace of mind that they provide. It’s the security that they can provide. Now I’m sure most of you know that the purpose of having a guaranteed lifetime income is to make sure that you have income coming in every single month, as long as you and your spouse are alive. We have, this is the main purpose, but in the financial industry, oftentimes you’ll hear advisors talk about this three legged stool.

For decades in this country, with Social Security combined with your pension and savings, this was able to get your parents and your grandparents through retirement because the savings, they could earn 8%, 10%, 12% pretty easily on either CDs or government bonds. That’s not necessarily the case anymore. Pensions no longer exist for most of you. Now, if you’re a federal employee or a state employee or here in Houston, a lot of oil and gas companies for long tenured employees still have pensions being offered, but for most of you, pensions no longer are a choice.

What we want to do in retirement, it’s just a basic tenet of retirement planning is have multiple streams of income, whether it’s from real estate, whether it’s from dividends, whether it’s from Social Security, any type of investment that gives you income is typically good for security and retirement because without income, there is no retirement. Without the pension, the lifetime income feature from an annuity does become an alternative to consider. We’re big fans in multiple streams of income. The more income you have from my experience, the more secure you are and there have been many studies shown that people who have a pension or an annuity for a guaranteed lifetime income are typically more happy in retirement and less concerned about the stock market.

Another benefit of a guaranteed lifetime income stream in retirement is that it dissociates market performance from the amount of income that you have. We want you to be in the market. You need to be in the market with a certain percentage of your portfolio which is determined by your situation, your risk tolerance, et cetera, but it is hard to absolutely plan around what the market is going to do in any given year. When it comes to income planning with the stock market, it does create some uncertainty because things beyond our control can completely blow that plan up.

If you have a million dollars you can take x amount of income but then if the market crashes, all of a sudden the market performance can affect your lifestyle, the amount of income you can take. One of the benefits or one of the purposes of a lifetime income strategy is to separate the performance of your portfolio from your lifestyle, from the amount of income that you live on. Of course, the purpose also is to help protect against outliving your money. These are some of the things that a lifetime income strategy can do for you, but what does this mean for you?

In my experience, I’ve seen that it does help people feel more comfortable and happier in retirement to have income deposited into their bank account no matter what the stock market is doing on a monthly basis. I’ve also found that it helps people feel more comfortable with spending money today, because they know they have a certain amount of income should they spend too much or should the market not perform on the back end of their plan that they don’t have to worry about running out, they don’t have to worry about being under a bridge and being completely homeless.

Okay, now we’re going to jump into how the guaranteed lifetime income feature works, how it’s calculated, and what you need to know when navigating the marketplace or when working with a financial advisor. If you watched the previous videos in this series, and this is a series designed to be watched from beginning to end, we talked about the fixed indexed annuity and the growth mechanism. The engine inside the indexed account that allows it to grow or gives it the opportunity and potential for growth. In that video, I put a T-chart up here and I said we’re just going to focus on the accumulation value today and learn how that works and everything you need to understand.

I said we’re going to come back to this other side in a future video when we talk about guaranteed lifetime income. Well, now we’re in that future video. To recap, the accumulation value, you make a deposit just like any other account and if you take money out, it’ll reduce that account balance, it will grow by some amount which we don’t necessarily know. They’re designed to average 3-6% on the principal growth side, but we don’t know exactly what that is going to be worth in 10 years, just like we don’t know what our stock account or any other account will be worth. The fixed indexed annuity has this feature. It’s a rider typically that you can attach to the contract and it’s called an income account.

The purpose of it is to guarantee that at some point in the future you have a pool of money that is much larger than what you deposited in order to withdraw an income from. That income will be guaranteed to last as long as you are alive. Let’s say your accumulation value over here averages 5%. That’s excellent. For a safe vehicle no market risk that’s good. Could average three, could average four, could average six. The income account value is a pre-determined guaranteed rate of growth. One of the most common numbers out there is 7% guaranteed growth. Many people may say, “Troy, well 7%, that’s too good to be true.”

Well, the catch is, whatever this account grows to at 7% you can’t just walk away with it. That’s not the purpose. It’s designed to ensure that you have a much larger pool of money to withdraw an income from and that income will be guaranteed for as long as you’re alive. Most of the companies out there in the marketplace today will guarantee this interest rate will compound for up to 10 full years. That means at the end of 10 years roughly we know we’re going to have about a $600,000 pool of money fully guaranteed no matter what the stock market does during that time frame, from which or from where we can withdraw a guaranteed lifetime income. This is the basic premise, but there’s more to the story.

If I were to ask you is 9% better than 7%? Some company out there or some contract was offering 9% guaranteed growth on the income account, is that better than 7%? Well the simple answer, if you look at it through a vacuum, is yes, 9% is better than 7%, but we have to understand that this is just one part of the equation when it comes to calculating what your guaranteed lifetime income will be. Remember, the only purpose to do this is because you want an income for life that is independent of stock market performance. You want to make sure if you run out of your other funds that you still have income.

The only thing that matters is how much income will I receive if I put x amount of dollars into the strategy. While 9% may grow to a higher number, whatever this number is the income account value we then have to multiply it by a distribution rate. This is what you might see in the marketplace. It’s important to point out that there are hundreds of companies out there. This is just an example, this is not standard across every single contract, some companies have higher or lower growth percentages. Some companies have higher and lower distribution rates. What we might see is if you just want the income guaranteed for your life only, a single lifetime pension, guaranteed lifetime paycheck.
You multiply in this example, to get the income amount you’ll receive, you multiply the income account value by the distribution rate. If you’re 60, 4.5%, if you want a guarantee it for you and your spouse’s life, you multiply it by a little bit lower number, because the insurance company is going to guarantee the income for two lives. If you’re age 65, you multiply it by 5, you multiply it on joint by 4.5%. Some companies will increase this distribution rate, so 4.6 at 61, 4.7 at 62, et cetera, some do it on age banded brackets, as we see here.

Most important part when you’re looking at these strategies is to look at them as part of a larger plan. This is just a tool. Once you have a plan in place, it sure makes it easier to identify what’s the best strategy to complement the rest of your plan, such as your stock portfolio, bonds, et cetera. Okay, so now a simple example. If our income account value grew to $600,000, and we had a distribution rate of 5%, our guaranteed lifetime income is $30,000 per year. Pretty simple. Before I move on to some comparative examples, we’re going to look at immediate annuities, we’re going to look at an investment portfolio, we’re going to do some comparisons.

I want to put everything that we’ve talked about so far, I want to bring it together for you. Accumulation value, we make a deposit of $300,000, hypothetically, let’s say the account grows to 450,000. Again, with fixed indexed annuities, your principals are 100% safe, you’ll never lose if the market goes down. In exchange for that safety, you’re typically going to average 3, 4, or 5, maybe 6% with the best growth opportunities out there. We have seen clients make double-digit returns, but the market has to perform well. You have to have a crediting method on cap that allows that to happen. We want to keep it simple, though, let’s assume over a 10-year period it grows to 450.

The income account is guaranteed at 7%. To make it simple, it grows to 600,000. Many contracts out there will say whatever is higher, whenever you decide to take income, the contractor will get what we call a step up. If the accumulation value is higher than your guaranteed lifetime income account, then your lifetime income will be based off the higher of the two values, but do not expect that to happen. Insurance companies base their reserves that the Department of Insurance requires them to have, if you remember back to the first video, there’s a dollar-for-dollar legal reserve system.

There are certain very stringent rules that life insurance companies must follow to make sure they can use that word, guarantee. They base their reserves, they base everything they do on the guarantees. It’s very unlikely that the accumulation value will ever outgrow the income account value. Now, during the accumulation phase, typically there’s going to be a fee for this 7% guaranteed growth. This is an important concept. The average in the industry is around 1%. Some of them might be 0.8, 0.9, 1, 1.1%. That’s about the average. The impact of the fee is calculated typically off this higher income account value.

Let’s say in year 2, it’s 350,000 at a 1% annual fee, that’s a $3,500 in real dollars fee. That fee does not reduce the income account value. This is a guaranteed calculation, it does come out of the accumulation value. Not all contracts do it this way. Some will calculate the fee based on the accumulation value. That’s a more consumer-friendly structure. Most companies will calculate the fee of the higher income account value. Of course, it always gets deducted from the accumulation value. Now, this fee does not reduce the amount of guaranteed lifetime income. That was a math problem. It’s a calculation.

The impact that it has is it reduces the amount of money that is left if you should pass away early to go to your beneficiaries. Every single time a yearly income payment is made, it will reduce the accumulation value. The fee that comes out will reduce the accumulation value. Any interest earned will increase the accumulation value.

This is a big difference between immediate annuities or other annuities that you have to do what’s called annuitize. Your principal can still earn interest. Just because we’ve activated our guaranteed lifetime income principal does not stop earning interest. There may be some questions about that, feel free to put them in the comment, but we’re going to continue to go through in this series more examples and you’re going to get or gain more and more familiarity with how these contracts actually work. I do want to point out that I’m speaking in generalities here. I’m not talking about any specific company, any specific contract.

I’m just trying to educate you so you understand what you need to know about how these operate, and also what the pros and cons are.

Different Annuities Examples

Now we want to compare what we just talked about, a deferred income annuity, with what we call a SPIA, or a single premium immediate annuity. Single premium deferred annuity, this is the fixed indexed annuity with that income rider attached to it that we just talked about. This is a single premium immediate annuity. Single premium, both of them same thing. It means you make one investment, one purchase payment, and you have a guaranteed lifetime income contract.

The difference is, this one immediately, the I immediately starts giving you an income, typically in 30 days. This one is a deferred income annuity. In my example, we deferred it out for 10 years. Again, why don’t we defer it out for 10 years? A couple of reasons. As part of a plan, we’re getting a guaranteed growth rate for every year we defer. Additionally, the distribution rate is increasing every single year we defer it. I have the numbers up here on the board but first I wanted to show you what the sheet here is. This is a quote tool that we use. If someone calls us and says, “Troy, I want an immediate annuity.” We’re an independent company so we don’t work with any one particular company.

Our job is just to find out what’s out there and help our clients get into the most amount of income available through the insurance products we offer. This is what we ran. Again, we’re looking at a 60-year-old male single lifetime income with what we call a 10-year period certain. That means if he makes his $300,000 investment and then gets hit by a bus the next day, that 10-year certain means that someone, a beneficiary, will receive a payment for 10 years. With the fixed indexed annuity, if he makes the investment, and it’s in the deferral stage where it’s growing, and then he gets hit by a bus, the full account value, the amount he put in plus any interest minus any withdrawals or fees is the death benefit that will go directly to whomever he named as a beneficiary.

What we want to do is compare the pros and cons of the immediate annuity with a deferred income annuity. By the time you’re watching this video, all these numbers will probably be different. This was a quote we ran, $300,000 income immediately, Nationwide actually came up number one. One thing to point out here you see Nationwide is about $90 above the number two company out there for immediate annuities. Nationwide is well aware of what the marketplace is paying. I don’t want to call it a promotion necessarily, but this is how insurance companies attract business.

They increase their rates. They make their strategies more attractive. Then once they hit their quota, and they get towards the end of the year, sometimes this will happen, they’ll decrease rates. They’ll make their products less attractive, and that helps them manage their books. Again, it helps them manage their reserves. By the time you’re watching this video, whatever is down here at the bottom may actually be the number one. Nationwide, which right now is number one for this particular scenario, it may actually be number six. A little insight into how the insurance industry works. If we took that 1653 it’s $19,836 per year, over a 30-year period, that immediate annuity will pay $595,000.
If he passes away after the 10th year, that 10 year certain, there is no more death benefit because he’s past the 10-year option. He received 10 years of payments. The single premium deferred annuity that we’re talking about in this video, if he defers for 10 years, the guaranteed lifetime income, the same situation right now, this is the number one in the marketplace for this particular situation may not be by the time you’re watching this video, or if you’re a different age, it may be a different number, income-wise, but over the next 20 years, because you defer for 10, receive income for 20, not only do you have a much higher lifetime income, but you’ll receive more over the same timeframe, over $105,000 more over the same timeframe.

Is one necessarily better than the other? No, I don’t like the term better. They’re just different. They have different purposes. They fit differently inside a plan. The important part is to understand what those differences are and help identify which is best for your plan. Okay, just a midway review here. We’ve talked about how the index annuity works when you add an income rider to it, the guaranteed growth, how that impacts the accumulation value, how the accumulation value is calculated with withdrawals coming out, if there’s any fee and then interest gains, adding back to that value.

We’ve compared it to a single premium immediate annuity, pointed out the differences between the deferred fixed index annuity with rider versus the immediate annuity, which pays you immediately. Now, I want to get across this point that these tools are not a replacement for your stock portfolio. The single premium deferred annuity, the fixed indexed annuity with income rider, it should complement your investment portfolio.

In the short term, the stock market can be volatile. When your accounts drop, a lot of times people become fearful. They become uncertain about the future. They start to spend less. We want your quality of life to maintain throughout retirement and that’s why what we’re talking about today should not be considered a replacement for the stocks in your portfolio. They could be considered a replacement for the bonds and the CDs or the money you don’t have really doing much, but either way, they should complement your investment portfolio.

With that said, I do want to do a quick comparison to show you the power of the fixed indexed annuity with an income rider when we’re talking about income planning because when it comes to the stock market, we have no idea what it’s going to be worth in the future. If we plan on a certain amount of income, those plans could be upended due to poor performance. With the fixed indexed annuity, we’re income planning. We know exactly what that income is going to be in the future. We can plan around that with the other choices we’re making with our spending, our investment risk tolerance, and everything else in our life.

We are going to look at a 55-year-old person with $300,000, and I just want to do a comparison. Keep in mind, it’s not to replace the stocks it’s to complement the stocks, but this does a really good job of showing the power of the indexed annuity with an income rider. Okay, so we have four different scenarios here. I’ve put the indexed annuity at the top row. I put the estimated value in 10 years, based on this growth rate, the amount of income that can be withdrawn with the annuity, it’s fully guaranteed, and then the investment portfolio utilizing the 4% rule.

At 7%, the account grows to 590. At 10% per year for 10 years, the account grows to 778, but utilizing the 4% rule at age 65, we see comparatively speaking, how much income each portfolio could provide given these three growth rates, and then we can compare that income to what is fully guaranteed with no market risk from the deferred income annuity. When I talk about complementing, this is what I mean. We have no idea what the market’s going to do, but if it does average 3% or 7%, the money in the annuity not only eliminates that market risk and uncertainty, it provides a substantially higher amount of income, it’s guaranteed for as long as you’re alive and there’s no risk for the remaining years of your lifetime of poor performance causing that account to exhaust and then there’s no more income.

With the indexed annuity income example here, even if you’ve received so many income payments that your accumulation value goes to zero, the lifetime income is still guarantee, you still receive that income as long as you’re alive. Now, this is percent of the original investment, percent of the original deposit, so in all of these examples, we deposited $300,000. No market risk, fully guaranteed 32,055 is 10.7% of your original deposit annually, no market risk for as long as you’re alive. Pretty self explanatory here with the other three scenarios, 5.4%, 7.9, 10.4. I hope the market does 10% a year, I hope it does 15% per year, but the question is what if it doesn’t perform at those levels?

Where are you getting your income from? How does that impact your lifestyle? Does that jeopardize your quality of life or standard of living and the big one is if something happens to you, will your spouse be okay? Will it jeopardize his or her standard of living? A lot of uncertainty with the stock market. This is just a financial tool that can help complement the portfolio while also removing uncertainty.

Before I jump into the last part of this video, the question ultimately comes down to, what do you value? That’s it. This is the math that shows how much income and how that income is calculated but for me, the math is almost irrelevant. Mathematically, it can make a lot of sense but my concern is how does this impact your quality of life, your happiness, your security. I’ve had clients before that said, “Troy, I hate annuities. I won’t touch annuities, don’t ever talk to me about them,” and that’s okay if they feel that way but those same people a lot of times are scared to death to spend money because they have it all in stocks and bonds and they’re afraid they either will run out.

They don’t know what it’ll be worth down the road and they simply can’t plan, so it creates a bit of paralysis. Throw everything else out the window. A lot of the decisions that we make in retirement comes down to, what do you value? Is it security? Is it peace of mind? Is it knowing that no matter what the stock market does, you’re going to have an income to go with your Social Security? If that’s the case, then this could be a viable financial tool for a part of your overall retirement plan. One last thing to point out here before I move on to the taxation of these strategies, a concept called stacking and I’m going to talk a little bit about Roth conversions with these contracts and how that can tie into an overall plan.

The 4% rule back to this chart that we’ve looked at and I’ve calculated what income would be provided based on various growth rates on a $300,000 portfolio over a 10 year timeframe. Look, I truly believe that the 4% rule is antiquated. It was developed some 30 plus years ago, maybe almost 40 now. Today’s environment is completely different. I’m much more a fan of what we call a dynamic spending model, but to convey a point here to tie into the conversation today, the 4% rule calculates 4% based on the account balance whenever you want to start taking income, then assumes an inflation adjustment each year, moving forward.

I just want to point out that at 3% growth, if we adjust this upwards for 3% or 4% annual inflation adjustments, it’s going to take 20 years before we get up to where we are right here. Even at 23,606, if we adjust up for a 3% inflation, it’s probably going to take 12, 13 years before we get up to where we are right now. Then obviously this one would surpass the guaranteed lifetime income. No doubt within a couple of years, within probably just one year, I guess, but the point is if we knew the market was going to average 10%, or we were going to average 10% in our portfolio, we wouldn’t be having this discussion. If this happens, great.

If this doesn’t happen, you have a solution, you have some insurance in place to mitigate the impact of poor performance over the next 10 years. Now, to tie into today’s conversation, there are increasing annuities out there, just the same type I’m talking about today. The difference is the distribution rates for increasing lifetime income annuities, the deferred income annuity we’re talking about today, the distribution rates start out lower. Instead of being 4.5%, it might be 3.5% or 4% for a 60-year-old. For a 65-year-old who wants a joint payout, instead of starting at 4.5% it may start at 3.5% or 4%.

These are options, and then you can compare on the marketplace what fits your retirement plan better. Increasing income annuities are available, just like we’ve talked about, the distribution rates just start lower, and how they calculate your annual income increase is different by contract. Some companies will tie it to the CPI, some companies will tie it to a fixed rate like 3%, some companies will tie it to the performance in the accumulation value. All different ways to slice the bread there, but the important thing to understand is that if you’re younger, or you have a very long life expectancy, maybe an increasing lifetime income annuity is something that’s more attractive for your retirement plan.

Stacking Plan

I want to briefly introduce you to a concept we call stacking. When we’re building out retirement income plans if this concept is attractive to you, when we build out the plan and look at the income needs, we’ll graph it out, we’ll chart it out, we’ll look at inflation, we’ll look at the go-go years versus the slow-go years. Sometimes when we have this stacking plan in place, where let’s say we have $500,000, if we wanted to dedicate it to guaranteed lifetime income strategies. Instead of putting it all into one contract and taking income from all of it at a certain point in the future, sometimes it’ll make sense to break it out into three different contracts, and tentatively plan on taking income at different points in the future.

We may plan on taking the bigger one first because that will give us a larger amount of income in our go-go years, but we plan on living a long time and we want to have some inflation adjustment. If this starts to give us, I don’t know, 18,000, 20,000 a year, and this one kicks on, gives another 12,000, 15,000 a year, this one kicks on, gives us another 12,000, 15,000 a year. Just throwing numbers out there. This was a concept called stacking and for some of you that may make sense as opposed to looking at a large contract and taking income all at one time.
How are fixed indexed annuities taxed? First and foremost, any gains, if we’re using non-IRA dollars, your gains are deferred, so you do not pay tax on that deferred income account or your accumulation value as gains are made. Only when you start to distribute the money as a lifetime income or as a simple withdrawal do you incur taxation, and they are taxed on what we call the LIFO method. It’s last in first out. The interest gains that we’ve earned and that have been deferred similar to your IRA, they have to come out first and 100% of that income is taxable. Then when we get down to principle, all those distributions are going to be tax-free.

Then once we get back into the insurance company’s pocket, all of those distributions again will be subject to income tax. When you use your retirement account money to allocate funds to an indexed annuity for lifetime income purposes or just safe growth, it follows the taxation rules of the retirement account. Now back in the ’70s, with variable annuities, and even the ’80s and ’90s and still, you’ll have some people who are really uneducated about annuities talk about this. They’ll say, “Troy, there’s no reason to ever put an annuity inside an IRA because the IRA is already tax-deferred and the annuity is tax-deferred.”

The reason you put money into a fixed indexed annuity is because of the benefits the contract provides, safe growth, protection from principal loss if the market goes down. The potential to earn reasonable rates of return- heck, the potential for double-digit returns in any given year. Then you start talking about guaranteed lifetime income and some of the things we’ve covered in this video. That’s why you put money into an annuity.

You don’t put money into an annuity because you want tax deferral. That is just such antiquated thinking. It’s the benefits that that investment decision has for your plan, why you make a decision as opposed to the taxation. We don’t ever let the tax tail wag the dog. One of the cool things about using IRA money is we can still do Roth conversions with these contracts. Now, if you do a larger deposit and just have one contract, some companies will allow you to incrementally do Roth conversions, what we call partial conversions. If you put $500 in, you can convert $100,000 each year.

Most companies don’t allow that. As part of our tax plan, if we’re planning on doing conversions over the years, we’re going to go ahead and break it out into, one, two, three, four, five different contracts and this does a couple of things. One, not only makes the Roth conversion more manageable from an income tax perspective, but it gives us more flexibility. I’m a big fan of breaking it out. Even if we think we’re going to need a specific amount of income at a specific point in the future, it’s your call. I like breaking it out regardless because this gives us the flexibility to take income at different points in time. It also gives us the flexibility to do Roth conversions.

Now a lot of times advisors won’t do this, because it’s a heck of a lot more paperwork and takes more time, but I believe it is the right thing to do for most people most of the time. Everyone’s situation is different. If you need $100,000 and you know you’re going to need $100,000 per year, probably no reason to break it out unless you’re planning on doing Roth conversions. I just want to point out that IRAs- you don’t avoid using IRA money necessarily, because of the dual tax deferral, that doesn’t change. You use these contracts because of the benefits they provide.

That’s the number one purpose. A benefit is if we do these Roth conversions now all of a sudden, we can have all this income, which is tax-free, and a lot of times this will lead to your Social Security being tax-free.

Check Out More Videos!

Check out some of the videos I’ve done on Social Security if you want to hear about that. I want to thank you for watching this video, a ton of content and as a reminder, this video is part of a series of videos on annuities designed to be watched sequentially. We don’t want you to jump into chapter eight before you’ve read the first seven.
Go back, check those out. The end screen here, we’re going to have a list of those videos, and we’re going to continue this series. We’re going to go much deeper dive into strategies, into planning and some of the more nuanced concepts of some of the videos that we’ve already covered. We’re going to continue the education and we’re happy you’re along for the ride.

Questions to Ask Before Buying an Annuity for Lifetime Income

– What is the guaranteed income amount?
– Is the income for one life or two lives?
– What is the income rider fee?
– Is the fee based on the accumulation value or the income account value?
– What happens to the remaining account value if I pass away early?
– Can the income increase over time?
– How long is the surrender charge period?
– What are the liquidity options?
– How is the annuity taxed?
– How does this fit with my Social Security, investments, Roth conversion strategy, and estate plan?

Key Terms Explained

Guaranteed lifetime income: A retirement income stream designed to continue for as long as the covered person, or covered couple, is alive.

Fixed indexed annuity: An insurance contract that can provide principal protection and interest-crediting potential tied to a market index, without direct stock market exposure.

Income rider: An optional annuity feature that can create a guaranteed income calculation, often for an added fee.

Accumulation value: The actual account value of the annuity, which may grow, be reduced by withdrawals, and pass to beneficiaries if available.

Income account value: A calculation value used to determine future income. It is usually not a cash value that can be withdrawn as a lump sum.

Distribution rate: The percentage applied to the income account value to calculate the annual guaranteed income amount.

SPIA: A single premium immediate annuity, which typically begins paying income shortly after purchase.

FAQ

What is guaranteed lifetime income?

Guaranteed lifetime income is an annuity feature designed to provide a predictable income stream for life. Depending on the contract, the income may be guaranteed for one person or for both spouses.

Why do retirees consider guaranteed lifetime income strategies?

Retirees may consider these strategies because they can help address longevity risk, healthcare costs, long-term care concerns, and uncertainty about future stock market performance.

How does a fixed indexed annuity income rider work?

A fixed indexed annuity income rider typically creates a separate income account value that grows according to a contractually defined formula. When income begins, that value is multiplied by a distribution rate to determine the guaranteed lifetime income amount.

Is a higher income account growth rate always better?

Not necessarily. The transcript explains that the growth rate is only one part of the equation. The distribution rate, fees, deferral period, payout type, and contract terms also affect the final income amount.

What is the difference between an immediate annuity and a deferred income annuity?

An immediate annuity usually begins paying income shortly after purchase, often within about 30 days. A deferred income annuity delays payments until a future date, allowing the income calculation to grow before income begins.

Can fixed indexed annuities replace a stock portfolio?

The transcript emphasizes that these annuities are not intended to replace a stock portfolio. Instead, they may complement a broader retirement plan by providing guaranteed income while other assets remain invested for growth.

What is annuity stacking?

Annuity stacking is a planning approach where funds are divided among multiple annuity contracts, with income scheduled to begin at different times. This can help create additional income layers later in retirement.

How are fixed indexed annuities taxed?

For non-IRA money, gains are generally tax-deferred until distributions begin, and withdrawals may follow last-in, first-out taxation rules. When retirement account money is used, the annuity follows the tax rules of that retirement account.

Can Roth conversions be used with annuity contracts?

The transcript explains that Roth conversions may be possible with certain annuity strategies, especially when contracts are divided into multiple pieces to create more flexibility over time.

What should someone ask before buying a guaranteed lifetime income annuity?

Important questions include how the income is calculated, what fees apply, how the death benefit works, whether income is single or joint life, whether income can increase, and how the annuity fits with the rest of the retirement plan.Top of Form

Ready to Build Your Retirement Income Plan?

Guaranteed lifetime income is just one piece of a successful retirement strategy. The right approach depends on your income needs, tax situation, investments, healthcare concerns, and long-term goals.

If you’re wondering whether an annuity, income rider, or other retirement income strategy makes sense for your plan, schedule a conversation with our team.

Contact us today to request an appointment and start building a retirement plan designed to help you feel more confident about your future.

Disclosure

Insurance services are provided through Oak Harvest Insurance Services, LLC, a licensed insurance agency. Some Oak Harvest investment adviser representatives are also independent insurance agents. The agents and Oak Harvest Insurance Services, LLC earn combined commissions typically between 1.5% to 8%, but can be higher based upon the product, in addition to other compensation.

Annuity contracts may be subject to caps and charges, including yield or rate caps, interest caps, participation rates, interest rate spreads, and surrender charges. Each of these may be subject to change over the life of the contract.

Terms like “guarantee”, “peace of mind,” “safety,” “principal protection,” “lifetime income, “guaranteed income,” or other guarantees are associated with fixed insurance products. No such language refers in any way to investment advice, investment advisory products, securities, or recommendations provided by Oak Harvest Investment Services. Investing involves risk. Rates of return are not guaranteed unless otherwise stated. All guarantees relating to insurance products are dependent on the financial strength and claims-paying ability of the issuing insurance company. Guarantees may be subject to various restrictions, limitations, or fees, which can vary depending on the issuing insurance company. Annuities have limitations and are not appropriate for all circumstances or individuals, and they are not intended to replace emergency funds or to fund short-term savings or income goals.

Lifetime income may be available on certain products through an optional rider at no cost or for an additional cost, depending on the specific product and contract. Taking withdrawals prior to turning age 59 ½ may result in tax penalty fees in addition to ordinary income taxes. Withdrawals from annuities may trigger charges or reduce the contract value and death benefit. Insurance products are not insured by any federal government agency and may lose value.