How Fixed Index Annuities Can Improve Your Retirement Income Plan.

A Deep Dive With Three Examples - Looking at Systematic Withdrawal Strategy, Flooring Strategy and the Bucket Strategy.

The Systematic Withdrawal Strategy

As you enter into retirement and consider how much of your next egg you can safely withdrawal each year you will most likely come across the 4% rule. The 4% rule is an assumption that you can take out 4% from your savings without running out of money. In order for this to work you must have a substatial amount saved and you must have other sources of income. I prefer to call this the 3%-8% rule. It's rate to actually withdrawal a set 4% each year, year after year. However, in this example we will use 4% as our systematic withdrawal.

Let's use these assumptions:

• Age 65

• $200,000 saved in a "managed" account

• 7% assumed annual rate of return

• systematic withdrawals start at age 68

So, perhaps your initial $200,000 would grow over the 3 years to $240,000. (results would vary depending on the market).

Results - if you withdraw 4% from $240,000 you would be getting $9,800 per year.

Is this income guaranteed ? No.

NOW - LET'S See how adding a FIA can help.

Same assumptions as above. But now $100,000 is put into a FIA for 3 years. Assuming it grows to $150,000 and then pays out $9,000 (6%) per year. Your managed account would now go form $1000,000 to $122,504 (assumed 7% growth from age 65-68) and would offer $4,900 per year (4% withdrawal). With this FIA and your other account you would be looking at $13,900 per year - instead of the previous scenario with only $9,800. Plus, $9,000 per year is guaranteed for life due to the contract agreement you hold with an insurance company.

Summary:

Without the Annuity

$9,800 per year - NO Guarantee

With the Annuity

$13,900 per year - with $9,000 of it being guaranteed.

This scenario uses a lot of assumptions and round numbers. Results vary and each situation is unique. Ready to talk about your situation. Let me know.

Additional assumptions - The FIA has a built-in income rider (at a cost/fee), 20% income base bonus, 10% Simple interest until income starts.

The Flooring Strategy

As you enter into retirement you can review your budget and label your expenses as needs vs wants. The flooring strategies seeks to set a "floor" that is funded by secure income to cover your needs and then uses high risk investments to fund your wants.

Let's use these assumptions:

• Age 65

• $40,000 per year in "needs"

• $15,000 per year in "wants"

• $55,000 per year in income needed

• Social Security of $30,000 per year equals a $25,000 income gap

• $500,000 saved 

If, you don't use the annuity you would be depending on the $500,000 to produce the $25,000 per year to fill the gap. However, due to the sequence of returns risk, you wouldn't know if you could count on the investments to produce the income or not. You are dependent on the market. If the market has great returns during your first couple of years of retirement you could be set. However, if the market has a couple of down years early into your retirement it could cause you to run out of money before you want to.

So, our solution is to spend $250,000k on a FIA that would produce $24,863/year in guaranteed lifetime income.*

*Several assumptions are used here. If the client moved the $250,000 into an annuity 5 years before retirement, and was set up properly with an income rider, etc....

Now, the "needs" and the "wants" are covered with the social security benefits plus the annuity. The remaining $250,000 in savings could be a cushion for your retirement spending and investments.

Use of this flooring strategy can take the pressure of your retirement years. You can rest assured that most of your expenses are covered with your safe money options.

The Bucket Strategy 

Key Points

• "Time segmentation" strategy

• Allocates funds based in immediate, near-term, and long term needs

Traditionally, bucket #1 would fund years 1 & 2 with cash. Bucket #2 would contain a balance of bonds and some stocks for funding years 3-10. Bucket #3 would be for years 11 and beyond and would contain mostly stocks/mutual funds. The riskier assets are in bucket #3 because they aren't needed for 10 years. 

A better way of structuring a bucket strategy would be to purchase a FIA for years 1-10 that would produce enough income per year for years 1-10. The remaining savings would be placed in mostly stocks and some bonds for 10 years. After the 10 years a portion of that portfolio could be used to buy a 2nd FIA to produce even more income - which would go along with the income from the first FIA. This 2nd FIA would help to combat inflation.  

Traditional:

Bucket # 1 - Cash (years 1-2)

Bucket # 2 - Bonds and Stocks (years 3-10)

Bucket # 3 - Stocks (years 11+)

With a FIA:

Bucket #1 - a FIA to cover yearly income for years 1-10

Bucket # 2 - a mostly stock portfolio that wouldn't be needed until year number 11

Bucket # 3 - buy another FIA at year 11 with a portion of the balance in bucket #2

Results vary and each situation is unique. Ready to talk about your situation. Let me know.