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Numerous companies are using income riders to provide future guaranteed income payouts to investors.  They use income roll up guarantees and bonuses to entice potential customers.   With all of the bells and whistles now available, it is easy to lose sight of the most important feature of all which is simply finding which company will pay out the most in any given year.   Here is a sample breakdown using the companies currently offering the highest future payouts.  For this example, we used a 55 year old male, investing $100,000 and looking for possible income in year 1, 5 or 10.

Guaranteed Annuity Income Payout Grid

Please feel free to call Edward Crowe at 203-796-5403 or email at  Edward@croweandassociates.com  if you would like to see a quote from a different company or any other variations such as age or amount.

With the decline of private pension plans and worries about the future of social security, retirement planning is more important than ever.  Many people make a commitment to save money in order to supplement Social Security and maintain our lifestyle when the time comes to retire.   We also spend a great deal of time trying to figure out the best investment approach available.

Unfortunately, most people have no idea how much they actually need to save.  A recent study in CNN Money showed that, of those saving for retirement, only 10% had assessed the amount they need to save.  The general concensus is to put away 6% to 8% percent of earnings every year but this really does nothing to address each persons unique situation. We also tend to ignore the substantial effects inflation will have on future income.

We utilizes a software program called IMAX that provides clients with a picture of how much they need to save for a comfortable retirement.  The program takes all current variable into consideration such as inflation rate, future social security payments and COLA increases, investment return, taxes, future living expenses, ect. in order to paint a picture of your savings needs.  IMAX will provides a detailed report on your current situation and will show if adjustments are needed going forward.  Using the program you can also see the effect that changes to current strategies will have on future results. 

Please contact us if you would like to have a personal profile completed.  There is no cost for this service and it will provide real, tangible information that can be used for current and future retirement planning.

A sample profile is attached here for review

Those who have qualified retirement accounts (An IRA, 401K, or other account that has never been taxed) will need to start paying Required Minimum Distributions (RMD’s) at age 70.5.   RMD’s specify that you must take annual distributions from your qualified accounts every year.  Failure to do so will result in substantial IRS tax penalties.  

For a updated RMD calculator click here

The RMD is based on a table that determines what percentage in a given year needs to be paid.  The percentage amount increase with age.  Roughly, a person who is 70.5 will need to take about 3.7% while a person who is 80 will need to take approximately 5.6%.  

Many people are taking money out of the qualified accounts every year for income which meets the RMD requirement on an annual basis.  This does not pose a problem for them but it does for people that are trying to preserve a qualified account in order to pass it on to heirs.   For them, the annual RMD reduces the amount in the account which reduces the amount they will pass on.   If they can achieve annual account growth in the market to off set the distribution, the account will be preserved but how many investors have been earning over 4 % every year with their investments?

Two companies have products that specifically address this problem.  Annexus (Aviva) and Security Benefit have both come out with annuities with RMD friendly death benefit riders.  These products will provide a minimum guaranteed growth on the account as a death benefit regardless of actual account growth.  In other words, the actual account value may be going down every year but when the owner dies, the death benefit payout will reflect a minimum growth of 4% per year. Both companies currently offer a 4% growth minimum. 

They both also offer a feature that allows any account value gains to be stacked on top of the 4% growth.  For example, if the Annexus product earns 3% interest in a year, the 3% is added to the minimum 4% death benefit growth for a 7% interest rate that year.  The accumulation accounts can never product less than a 0% return in any given year which means the death benefit will never grown less than 4%

Both products will work well to preserve qualified assets for those looking to pass them on.  The Security Benefit Product currently has a 10% bonus which gives it a small edge however.

Click here for illustrated example of a 70 year old with $100,000

When it comes to generating guaranteed income, Security Benefit has had the highest paying deferred income product on the market for two years with the Secure Income Annuity.  The Secure Income annuity has simply provided the highest payout to clients looking for future income.

With the release of their new product called the “Total Value Annuity” they are taking a different approach.  While the Secure income annuity provided the highest income payout, it did not offer any additional features that someone may be looking for.  So how does the new  “Total Value Annuity” stack up with the “Secure Income Annuity”?  Here is a review

Income- The Total Value annuity provides a 10% bonus on premium and then will roll up income payments at a guaraneed minimum of 4% compound per year.  The payouts in year 1 are comparable to those provided by the Secure Income annuity in the fist year. (The older Secure Income Annuity starts to payout substantially more as you defer income for multiple years however)  It also provides the potential for higher payouts by using a stacking feature.  This feature allows any market based gains to be added on top of the 4% minimum in any given year.

Which is better?- The older “Secure Income Annuity” simply offers guarantees that the new product can not match.  While the new version gives potential for greater income gains, it can not guarantee them for income planning purposes. The “Secure Income Annuity” clearly wins when it comes to income.

Death Benefit– The old Secure Income product only guaranteed the account value as a DB.  The new product provides a 10% bonus and a guaranteed DB roll up of 4% compound to the payout per year.  It also allows for any gains to be stacked on top of the 4% minimum. This option will be very appealing to those who want to leave as much qualified money as possible to heirs without the Required Minimum Distributions eating away at the account balance.  This provides a substantial guaranteed Death Benefit and is a huge advantage over the old product.

Which is better?- New product is a huge improvement over the old product and offers one of the best Death Benefit options available

Potential for Account Value Gain- The Total Value Annuity offers the same accumulation accounts as the old product with an annual point to point account capped at 3% per year and a fixed account at 1.25% per year.   The big difference is in the ALTVI account.  The TVI (Called the Trader Vick) is a diversified futures account created by RBS.  The account is run on a 5 year point to point with 100% of gains credited to the accumulation value after 5 years.  In normal english, you put money in year 1 and then at the end of year 5 you get any interest gains.

This allows for much greater growth potential than can be achieved with the conventional fixed indexed annuity.  The gains are also stacked on top of the guaranteed 4% annual growth of the death benefit rider or income rider if they are chosen.

Which is better?-The new product clearly offers big advantages with accumulation growth.

The ability to sustain a steady income during retirement years has always been a primary concern for people in the United States. Recent studies have shown that 61% of U.S residents age 44 to 75 are more afraid of running out of savings/income than they are of death. In order to avoid exhausting a savings nest egg, guidelines have been developed. The most popular is the 4% income rule.

The 4% rule was developed in the early 1990’s by a certified financial planner named William Bengen. He set 4% as the amount of money a retiree can take out of their investments every year with a high probability that it will last for at least 30years. Since that time, financial advisors have been using it as the benchmark with clients.

A recent study from The Journal of Financial Planning has suggested that 4% is no longer a safe number. The study determined that 1.8 % is more appropriate to ensure income does not run out during retirement. The revised rate was based on many market factors. One marker was the historically high price to earnings ratio in the market which may lead to low future investor returns. The risk of poor market timing was also a factor. Taking income at the start of a bear market can have a drastic negative effect on account values and the ability to take future income.

Using a 1.8% model instead of a 4% model may be safe but it has obvious drawbacks. Consider that a person with a $500,000 investment account can only safely pull $9,000 a year from it versus the 4% model which allowed them to take $20,000 a year. If the 1.8% rule is going to be followed, there is an obvious need to increase the investment nest egg prior to retirement which may not be feasible for many people.

An alternative to this approach would be to use a guaranteed insurance contract (GIC) to create the needed income. The advantage of guaranteed contract is the ability to draw a much higher percentage of income on a guaranteed basis. The most competitive GIC’s will currently pay 5.5% to 6.0% income for life on a single life and 5% on a joint life basis. Most contracts do not require forfeiture of the lump sum invested. Some GIC contracts also offer a guaranteed roll up rate during the accumulation period. It is not uncommon for companies to offer a 7% or 8% compound accrual rate for up to 30 years. The guaranteed roll up allows for more precise planning of future asset needs.

While using a GIC can offer many advantages, caution most also be taken. There are hundreds of companies currently offering various bells and whistles on GIC contracts in order to gain market share. Some offer benefits or rates that look appealing but really have little benefit to the consumer. Others will promote incredibly high roll up on accumulation but will then lower the guaranteed income payout. The most important features should be compared prior to choosing a contract in order to obtain the best guarantees available.

It is important for most retirees to create additional income streams in addition to social security in retirement. Many will rely on minimum distributions from qualified accounts (IRA’s, 401K rollovers, SEP plans, etc) and non qualified retirement plans to create additional income.

Retired couples will often only have one person receiving additional income. This strategy works well as long as the primary person drawing income is alive but an unplanned death can leave the surviving spouse short on income.

If the deceased spouse had substantial amounts of life insurance or other investments, the surviving spouse can use the proceeds to create their own income stream. Unfortunately, the odds are that the deceased spouse would not have an adequate amount of life insurance to allow for a new income stream to be created.
Using a joint income option is a great way to protect both members of the couple in the event the other passes away.

There are now a number of companies that provide very strong payout options. Most will offer guaranteed income numbers that will increase in the deferral phase prior to turning income on. The payment will not expire until the death of both members.

A number of companies offer joint payouts and the highest paying company changes often. The current leader in this type of contract is Security Benefit. They currently offer the highest single and joint payout in the field.

We will use a 61 year old male and his 61 year old wife as an example. Assume they have saved up $200,000 to supplement retirement. If they defer the money for 5 years, Security Benefit will pay them a Joint lifetime income of $16.186.00 a year guaranteed. This represents over an 8% joint payout percentage. If the defer for 7 years, the income would go up to $20,000 a year putting the payout at 10%.All payouts are projected on a guaranteed basis making it easy to plan for future income needs.

There is no doubt that a new company will counter with a higher payout at some point but for now, Security Benefit is the clear leader.

The average 5 year CD rate is 1.16% nationally and 1.34% in Connecticut. An A rate insurance carrier is currently offering a 6 year fixed rate at 3.15% for deposits under $100,000 and 3.25% for $100,000 and above. The plan comes with a 100% return of premium feature at any time, even if surrendered during the first year.

The company has stated that they will be offering this rate until March 15, 2012. The rate is subject to change after that date. 3.15% is certainly a strong rate compared to current CD offerings but it is bolstered even further by the return of premium feature.

It is always advisable to have reserve or emergency money to guard against financial crisis.   Those who are fortunate enough to have reserve money set aside usually keep it in a savings account or money market.   The idea is to keep the money in an easily accessible account and to limit any fluctuation in value.  In other words, it is not a good idea to have risk in an account that you may need to draw money out of for an emergency.

Money markets and savings accounts keep money liquid and safe from fluctuation but they do not provide much of a return either.   The average savings account yields less than half a percent of interest per year.  The cost of sacrificed return can add up over time.   For example, consider a 54 year old that keeps 50,000 in a savings account of some type of money market for 10 years.  Assuming they are getting a .25% return at the end of 10 years they will have $51,264.00 in their account.   The money certainly was accessible the entire time but the client only made $1,264.00 over the 10 year period.

As an alternative,  a return of premium fixed indexed annuity with an income rider could be considered.  The plan has 100% return of premium at any time. This provides quick (3 day turnaround) access to the initial investment at any time without any risk.  If $50,000 is put into the account, it can always be surrendered for a minimum of $50,000.  Accounts of this type will gain anywhere from 0% to 5% interest a year for an average of 2.5% to 3% which can offer greater growth potential than a savings account or money market. 

 The bigger benefit is the  account will also grow as a guaranteed income stream over time.  One of the more competitive companies currently offers a guaranteed growth of 10% simple interest per year.   If the same 54 year old put $50,000 into this account and did not ever need to access it, they would have a benefit base of $100,000 that they could draw 5.4% out of per year guaranteed.  This would generate $540 a month on a guaranteed basis for life.  They would not be forced to use this option but could do so if the need for extra income arose in the future.

Many return of premium annuities also offer a death benefit option  with the account.   If the account holder was to pass away at any time during the 10 year period, the account would pay out the income rider value as a death benefit. To stay with our example, if the 54 year old died in year 6, the account would pay out $80,000 as a death benefit to the current beneficiary.

A return of premium annuity offers a number of advantages over the traditional safe money strategies. The account holder can still maintain  liquidity while having the  additional earning potential and the ability to use the money for income purposes down the road.