Using Annuities Genius to Derive the Highest Lifetime Income

Annuity companies are massive legal reserve insurance companies that are heavily regulated and most have a long history. If World War III breaks out and nuclear war occurs, annuity companies and cockroaches will likely survive.

If you use an insurance company with an A- financial rating or better, there is essentially no safer place for your money. Babe Ruth invested his money in annuities just before the Great Depression at the advice of his financial advisor, and they paid him during the worst economic period in American History, as his career came to an end. 

Annuity companies are legally required to set aside reserves to pay you (hence the phrase "legal reserve" insurance company), and their consumers face surrender charges if they try to pull all their money (preventing a "run on the bank"). Their financial solvency is thus doubly protected. Your money is safer here than banks (see: Silicon Valley Bank), and certainly the stock market.

My only caveat is that I would generally not use a company with a rating lower than A-.

This video is from when I just launched my Registered Investment Advisory (RIA) firm from a small, windowless Regus office with what felt like overhead hospital lights. I started my business with an assumption consumers were out there looking for solutions, but wanted radical transparency, not pinstriped suits and pocket squares. As a result of people gravitating to this approach, I have since "moved up in the world" to a nicer office, with (thankfully) softer lights and a window view. 

Yes. If the market gains, crashes, or anything in between, you get the same payments for the rest of your life.

If you chose joint guaranteed lifetime income, your spouse continues to receive the same payments until he/she also dies.

If you, or both you and your spouse (in the case of guaranteed joint lifetime income) die prematurely, there is a "death benefit" that would go to your beneficiaries.

By about the 12th-15th year in most contracts, there is no death benefit left, as the annuity company is on the hook to keep paying and paying.

Yes. You would want to do business with an annuity company that makes money. This is why they can guarantee payments to you. This would be preferable to working with a company that loses money.

"But don't these companies have fancy, shiny downtown office buildings?" I mean, yes--they have workers (actuaries, servicing, etc.), and it makes sense to have those workers in the same location so that they are effective. And their office towers may be "shiny" and "downtown" but most of them are headquartered in places like Des Moines, Iowa.

The annuity company makes money because they take your money, and tens of thousands of others, and price out guaranteed lifetime income they can pay you and other policyholders, based on what their actuaries tell them.

If you want to "beat the annuity company" at this calculation, secure a guaranteed lifetime income annuity contract, take care of yourself, stay healthy, and live a long and enjoyable life. The annuity company will be contractually on the hook to keep paying you. 

Yes, but the payments start lower and where the "lines cross" is usually not worth it.

They are also often based on performance of a stock market index, which is not always reliable. 

For someone with a significant longevity risk (30-40 years of retirement or more) we would layer multiple guaranteed lifetime income streams, deferring some and "turning on" additional guaranteed lifetime income at different times in their retirement.

Here is an example of a client using guaranteed lifetime income annuities to meet lifestyle, with the remainder of the portfolio invested in a diversified portfolio, or private market strategies.

Separate from Guaranteed Lifetime Income, another approach is Fixed Index Annuities (FIA), which offer the potential to capture gains tied to a market index subject to a cap (upper limit) or participation rate, with no downside risk and no fees. You generally can withdraw 10% per year, and/or RMDs, penalty-free. This solution has it's merits but does not provide guaranteed income you cannot outlive. There is an opportunity to capture market gains, but the upside is not guaranteed. However, there actually is a strategy for Roth Conversions using this approach. Contact us to explore this solution further.

That being said, if you are looking for a guaranteed--no ifs, ands, or buts--income, a guaranteed lifetime income annuity contract will never impress you or disappoint you. It will just deliver.

 These are all internal machinations of the annuity company to ultimately produce the guaranteed lifetime income figure they offer to you. Do not let an advisor deceive or confuse you because there is a high benefit base, bonus to the benefit base, or payout factor. It's like bringing flour to a bakery and getting seduced by their "process," rather than counting how many loaves of bread they ultimately deliver to you. Even a rider fee to produce the income is irrelevant--what matters is that, net of all of these internal machinations, we use the company that gives you the highest lifetime income offer. 

Usually this concerns variable annuities, which have market risk and indeed, rather high fees.

Much of the criticism of annuities has been engineered by advisors who want to keep all your money under their Assets Under Management (AUM) fee for recurring revenue. Unless it's a variable product, in almost all other cases if you pursue a solution in the form of an annuity, the advisors loses the ability to "wrap a fee" on this portion of your portfolio. 

The annuity companies pay a commission, usually 4-7% of premium submitted, to the advisor or insurance agent for sending a client their way.

The commission received does not come from your premium / balance. The annuity company pays advisors an insurance agents separately, from their general fund.

Annuity salespeople can cause grief to the industry when they:

• Fail to transparently shop the annuity marketplace for the highest lifetime income product available. 

1. Sometimes, advisors / agents are only contracted with a few companies, so that's all they'll show you. 
2. Or, they are trying to steer new business to one company to get a boosted commission, or qualify for a trip or other benefit.

• Overstate the potential returns of a performance-based (not guaranteed lifetime income) product, or overstating other features of the product.

 Several. I mostly avoid Variable Annuities due to the fact that they maintain market risk, and incur a yearly advisory fee. The annuities I most often discuss with clients are: 

• Single Premium Immediate Annuity (SPIA): income payments, generally for a set period ("period certain"), as opposed to lifetime. Good to fill income needs for a "bridge" of time until another income source (pension, SSI) "turns on." Also, a SPIA using nonqualified (not 401k or IRA) premium is the only annuity that can be tapped for income prior to age 59.5 without penalty. Often useful for the early retirees, and other young and rich folks.
• Deferred Income Annuity (DIA): same as a SPIA, but you wait to turn the income on (and thus, does not avoid the 59.5 early withdrawal penalty).
• Fixed Annuity or Multi-Year Guaranteed Annuity (MYGA): like a CD with better rates, for longer, and with better liquidity. A certain (fixed) return for a period of generally 1-15+ years, guaranteed, and commonly the ability to withdraw 5% or 10% from the balance each year.
• Fixed Index Annuity (FIA): ability to capture the gains from a stock market index subject to a certain cap (upper limit) or participation rate in the index. 100% principal protection and no advisor fees. Generally, the ability to withdraw 10% and/or RMDs each year. Highest potential return, but the returns are not guaranteed and income is not guaranteed for life. Often a good proxy for a bond portfolio, or as a Roth conversion strategy. 
• Guaranteed Lifetime Income: what we are discussing here. Income can start immediately, or be deferred for a period of time. Payments continue for your lifetime.

If you do the math, the same premium in a guaranteed lifetime income usually produces a higher income payment than the 4% rule. The counter argument is that the money in your portfolio remains "liquid," but not really – you need the money to sit in the portfolio in order to take your withdrawals. The 4% rule has also been criticized as being unreliable. 

 Sometimes. Usually these features are overstated and/or have loopholes to them. We can talk about them if your particular annuity illustration offers them. 

Generally not. Most annuity products are advisor sold. Meaning, you have to book an appointment, and then I will help pursue the annuity on your behalf.