A recent study showed us that three out of four people fear running out of money more than they fear dying. [intro music] Hi, I’m Troy Sharpe, CEO of Oak Harvest Financial Group, host of The Retirement Income Show, and CERTIFIED FINANCIAL PLANNER™ Professional (CFP®).
Today, we’re going to talk about how you can protect against running out of money later in life and feel secure, knowing that no matter how long you live, in addition to social security, you have another guaranteed lifetime income paycheck being deposited into your bank account every single month.
Now, before we get to the deferred income annuity, I want to dispel certain myths about annuities. The first one, if you pass away by holding your annuity, the life insurance keeps your money. Not true. Second, while your annuity is deferring, you don’t have access to it. Not true, again. Most deferred annuities give you access to about 10% of your account balance per year Yes, if you pass away, your family gets all principal and interest.
Yes, if you need to access your money while it’s in the deferral stage, you have access typically up to 10% per year. You want to make sure that any type of fixed annuity or deferred income annuity that you use comes from a highly rated insurance carrier. The life insurance industry is one of the safest places in the world for you to put money in retirement. They’re subject to a dollar-for-dollar legal reserve system, they get audited by every state they do business in, and they have a transfer system in place. A life insurance company can never file bankruptcy. It’s against the law.
How can a deferred income annuity work now that we’ve dispelled those myths, and how can it fit into your portfolio to generate guaranteed lifetime income? When we look at deferred income annuities, we have a lot of different types out there. This is just one example. It’s not meant to suggest this is how all deferred income annuities work, but it’s how a lot of them work out there in the marketplace today. Think of it as you make a deposit, as I said, you have access to this money typically 10% per year. If you pass away, your principal plus interest goes to your family.
Now, what the life insurance company is going to do is they’re going to say, “Since you’ve deposited this money with us, we’re going to give you a guaranteed rate of return.” Right now, 7% is a pretty popular number. It’s going to defer until you decide to activate lifetime income. You could let it defer for 2 years or 5 years or 10 years, or even longer with some companies. The catch to this guaranteed 7% is let’s say, you let it defer for 10 years.
Your $300,000 is going to turn into about $600,000. The catch is you can’t take that 600,000 and walk away with it. It’s a deferred income annuity, which means whatever it grows to, you have to use that much higher pool of money to take a lifetime income from. This is how the life insurance company can guarantee you 7% interest in a 1% world.
The $300,000 let’s say, we let it defer for 10 years, it’s going to grow on a guaranteed basis to about $600,000 give or take. Now, that 600,000, it gets multiplied by what we call a payout factor. This payout factor, you decide, do you want a single lifetime income, or do you want a joint lifetime income? The single income means the pension is guaranteed for as long as you live.
The joint income means the pension is guaranteed for as long as both you and your spouse are alive. Typically, these payout factors are anywhere between 4.5% and 7% depending on your age and if you choose a single lifetime income or a joint lifetime income. Let’s assume it’s right around 6%. Your $300,000 grows to $600,000. You multiply that by 6% in this example. That gives you 6 * 600 $36,000 per year of guaranteed lifetime income.
Now, while you’re receiving that guaranteed lifetime income, and let’s say one of those self-driving Teslas just comes around the corner and takes you out the very next day, the life insurance company, once again, does not keep your money. The principal that you’ve put in plus the interest that you’ve earned over the years goes to your family. The insurance company doesn’t keep it. If you live to be 80 or 90 or 120, you’re going to receive that guaranteed lifetime income no matter how long you’re alive. Now, some of these deferred income annuities give you inflation-protected income.
Some are just a flat-level income. As I said, there are many different flavors out there, many different styles. What you should do if you’re interested in something that’s going to protect your principal 100% guarantee, give you a growth rate that you can use to guarantee you have a much higher pool of money in the future to take an income from and then provide a lifetime income if that’s attractive to you, you want to sit down with a professional retirement income planner and say, “I want to go through deferred income annuities and see how they can fit into my overall portfolio.”
This is something that we do with clients on a daily basis. Now, one thing I want to point out is we don’t buy a deferred income annuity in a vacuum. Meaning, we don’t just go to someone and say, “Hey, I want to put $200,000 here. How much is it going to give me?” You can do that, but it’s not as efficient as if you work with a professional that builds retirement income and tax plans for a living because when you work with somebody who does the entire planning, they’re going to be able to identify not only the best out of all the different types out there in the marketplace, but integrate that into a retirement plan and help you figure out when the best time is to take it. For example, should you defer social security or take that sooner?
Should you use the annuity? Should you take dividends and interest from your portfolio? All those decisions need to be worked in to a retirement income plan. Then, of course, taxes need to be looked at as well The deferred income annuity can be a very powerful tool in retirement if you want your principal protected, you want a guaranteed growth rate for income purposes and you like the idea of having a paycheck deposited into your account every single month for as long as you’re alive. Lots of different flavors out there, so I encourage you to learn more.
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