Annuities Deferred Income Annuities Fixed Index Annuities Retirement Income Planning

Looking for a Deferred Fixed Income Annuity on Steroids?

Deferred income annuities (DIAs) have been getting a lot of attention since the Treasury and IRS finalized a regulation in July, 2014 blessing the use of qualified longevity annuity contracts, or “QLACs.” A QLAC is a DIA that’s held in a qualified retirement plan such as a traditional IRA with a lifetime income start date that can begin up to age 85. It’s subject to an investment limitation of the lesser of $125,000 or 25% of one’s retirement plan balance.

Fixed Income Annuity Hierarchy

For individuals concerned about longevity who are looking for a sustainable source of income they can’t outlive, fixed income annuities are an appropriate solution for a portion of a retirement income plan. There are three types to choose from:

  1. Immediate annuities
  2. Deferred income annuities (DIAs)
  3. Fixed index annuities (FIAs) with income riders

The overriding goal when choosing fixed income annuities is to match after-tax income payouts to periodic amounts needed to pay for specified projected expenses using the least amount of funds. Immediate annuities, with a payout that begins one month after purchase date, are appropriate for individuals on the cusp of retirement or who are already retired. DIAs and FIAs with income riders, with their built-in deferred income start dates, are suitable whenever income can be deferred for at least five years, preferably longer.

Assuming there isn’t an immediate need for income, a deferred income strategy is generally the way to go when it comes to fixed income annuities. This includes one or more DIAs or FIAs with income riders. Which should you choose?

DIA Considerations

As a general rule, DIAs and FIAs are both qualified to fulfill the overriding income/expense matching goal. Both offer lifetime income payouts. If your objective is deferred lifetime sustainable income, DIA and FIA with income rider illustrations should be prepared to provide you with an opportunity to compare income payouts.

DIAs can also be purchased for a specified term of months or years. This can be important when there are projected spikes in expenses for a limited period of time.

DIAs may also be favored when used in a nonretirement account since a portion of their income is treated as a nontaxable return of principal. Finally, if you’re looking to defer the income start date beyond the mandatory age of 70-1/2 for a limited portion of a traditional IRA, a QLAC, which is a specialized DIA, may be an appropriate solution.

Let’s suppose that you’re a number of years away from retirement and you’re not sure when you want to retire or how much income you will need each year. A DIA may not be your best choice since you lock in a specified income start date and income payout at the time of investment with most DIAs.

FIA with Income Rider Features

FIAs with income riders hold a distinct advantage over DIAs when it comes to income start date flexibility. Unlike a DIA, there’s no requirement to specify the date that you will begin receiving income when you purchase a FIA.

The longer you hold off on taking income, the larger the periodic payment you will receive. Furthermore, there’s no stipulation that you ever need to take income withdrawals. This is ideal when planning for retirement income needs ten or more years down the road.

For individuals not comfortable with exchanging a lump sum for the promise of a future income stream beginning at a specified date, i.e., a DIA, a FIA with its defined accumulation value and death benefit, offers an attractive alternative assuming similar income payouts. While an optional death benefit feature can be purchased with a DIA to provide a return of premium to one or more beneficiaries prior to the income start date, this will reduce the ongoing income payout amount.

A FIA also has a defined investment, or accumulation, value that equates to a death benefit. Unlike with most DIAs, flexible-premium FIAs offer the ability to make additional investments that will increase income withdrawal amounts in addition to the investment value.

Some FIAs offer a premium bonus that matches a limited percentage, e.g., 5%, of your initial, as well as subsequent, investments for a specified period of time. The accumulation value is also increased by contractually-defined periodic interest credits tied to the performance of selected stock indices.

Finally, a FIA’s accumulation value is reduced by withdrawals and surrender and income rider charges. Any remaining accumulation value is paid to beneficiaries upon the death of the owner(s).


A comprehensive retirement income plan is a prerequisite for determining the type(s), investment and income payout timing, and investment amounts of fixed income annuities to match after-tax income payouts with projected expense needs assuming that longevity is a concern. If you don’t have an immediate need for income and your objective is lifetime sustainable income, DIA and FIA with income rider illustrations should be prepared to provide you with an opportunity to compare potential income payouts.

With their ability to match a spike in expenses for a limited period of time, term DIAs offer a unique solution. When it comes to lifetime income payouts, FIAs with income riders, with their flexible income start date and accumulation value and associated built-in death benefit, are, in effect, a DIA on steroids.

Given the foregoing advantages and assuming similar income payouts, FIAs with income riders generally offer a more comprehensive solution for fulfilling sustainable lifetime income needs, with the possibility of a larger death benefit. A potential exception would be when investing in a nonretirement account for higher tax bracket individuals subject to one’s preference for a flexible income start date and accumulation value/death benefit in a particular situation.

Last, but not least, all proposed annuity solutions should be subjected to a thorough due diligence review and analysis of individual life insurance companies and products before purchasing any annuity contracts.

Annuities Fixed Index Annuities Retirement Income Planning

Looking for a Pension with a Flexible Start Date?

If you want peace of mind when you retire, you need to have a plan that will generate sustainable income streams that will cover a large portion of your fixed and discretionary expenses. Income tax planning is critical since your income needs to be calculated net of income tax to determine the amount that will be available for spending.

A sustainable income stream is simply a regular series of payments that, once it begins, will continue for the rest of your life. An ideal sustainable income stream is one that’s calculated using life expectancy and has a flexible start date. The longer you wait to turn on your income, the greater the periodic payment.

Social Security is a great example of a sustainable income stream that meets these criteria. Although you can begin collecting as early as age 62, you can also delay your start date to as late as age 70. The longer you wait, the greater your monthly payment. Assuming a full retirement age of 67, your benefit will be 80% greater if you delay your start date from 62 to age 70, excluding cost of living adjustments.

While Social Security is an important cornerstone of most retirement income plans, it generally needs to be supplemented by other sources of sustainable income. Even if you qualify for the maximum monthly benefit of $2,663 assuming you reach full retirement age in 2015, your annual benefits of approximately $32,000 may be reduced to as little as $21,000 after income tax, depending on your other income and income tax bracket.

Fortunately, there’s another source of sustainable income beside Social Security that’s calculated using life expectancy and also features a flexible start date. It’s offered by life insurance companies and is called a fixed index annuity (FIA) with an income rider.

Unlike the start date of Social Security which is limited to a window of eight years (age 62 to 70), a FIA income rider start date is open-ended. Generally speaking, the only requirement is that you must be at least age 50 when you begin receiving income. Assuming you meet this condition, you can start your lifetime income stream at any age you choose.

Similar to Social Security, the longer you defer your start date, the greater your lifetime income payments will be. Other factors that will influence your income payment are the age at which you purchase your FIA, your original investment amount, additional investments if permitted, premium bonus when applicable, and non-income withdrawals. The calculation of your payment amount is defined by the income rider provision of your FIA’s contract.

Since the calculation of your payment amount is contractually defined, you can determine the amount of initial and ongoing investments required to provide you with a target amount of income beginning at one or more specified ages of your choice before you purchase a FIA. Furthermore, if you need different amounts of income beginning at different ages, you may want to consider investing in two or more FIAs with income riders.

In addition to meeting the criteria of an ideal sustainable income stream, i.e., one that’s calculated using life expectancy and has a flexible start date, a FIA with an income rider offers another benefit that can be important where there are potential beneficiaries. Unlike other types of fixed income annuities, i.e., immediate and deferred income annuities, a FIA has an accumulation, or cash, value.

The accumulation value increases by purchases and premium bonuses and decreases by income and non-income withdrawals and income rider and surrender charges. Any accumulation value remaining at the death of the contract owner(s) will be paid as a death benefit to the beneficiaries.

As stated at the beginning of this post, income tax planning is a critical part of the retirement income planning process since your income needs to be calculated net of income tax to determine the amount that will be available for spending. All income payments from FIAs with income riders are taxable as ordinary income. This is true whether they’re held in traditional IRAs and other types of retirement plans or as nonqualified, i.e., nonretirement, investments.

If you’re looking for a pension with a flexible start date to increase the amount of your fixed and discretionary expenses that are covered by sustainable income throughout your retirement, one or more FIAs with an income rider may meet your needs.

Retirement Income Planning

Can We Still Plan to Retire at a Specific Age?

Not too long ago it was common for pre-retirees to depend on two sources of retirement income: Social Security and a private or public pension. Both began at age 65, were expected to last for life, and typically met 50% or more of retirees’ financial needs.

With two secure sources of lifetime income, age 65 was the standard retirement age for many years. Retirement income planning focused on closing or narrowing the gap between one’s projected retirement income needs and what would be provided by Social Security and pension income.

Retirement Planning Milestone

The decline of defined benefit pension plans over the past 30 years eliminated one source of dependable lifetime income for most retirees. The replacement of these plans with 401(k) defined contribution plans was a milestone in the retirement planning world since it transferred the responsibility for funding retirement from employers to employees.

Retirement income planning has dramatically increased in importance in recent years as employees have realized that it isn’t easy to (a) accumulate sufficient assets in 401(k) plans to generate adequate retirement income and (b) convert 401(k) plan assets into sustainable lifetime income streams beginning at a specified age.

The shift from employer defined benefit to employee defined contribution retirement plans, combined with longer life expectancies, has made it much more challenging to plan for retirement at a specific age. While it’s definitely possible, it requires a different mindset and the assistance of an experienced retirement income planning professional to increase one’s opportunity for success.

Retirement Income Plan is Essential

As part of the change in mindset, it’s important to understand and recognize that a retirement income plan is an essential tool for helping individuals close or reduce the gap between projected retirement income needs and what will be provided by one source of sustainable lifetime income in many cases, i.e., Social Security. Unlike other types of financial plans, a retirement income plan typically isn’t a “one-and-done” exercise.

A successful retirement income plan generally requires an ongoing disciplined, systematic, approach beginning at least 20 years prior to retirement and continuing for the duration of retirement. The purpose of such a plan should be to make sure that sufficient assets will be saved at specified times using tax-advantaged investment and protection strategies that will increase the likelihood of providing adequate and reliable after-tax income to cover one’s planned and unplanned expenses beginning at a specified age for the duration of retirement.

With the shift from employer to employee retirement funding, can we still plan to retire at a specific age? I believe that it’s possible provided that we understand (a) the burden for making this a reality has shifted from employers to employees, (b) a retirement income plan beginning at least 20 years prior to retirement in most situations is essential, and (c) a lifetime commitment is required to monitor and update the plan in order to reduce the risk of outliving one’s assets.

Annuities Deferred Income Annuities Longevity Insurance Qualified Longevity Annuity Contract (QLAC)

QLACs are Here

Since the Treasury and IRS finalized a regulation in the beginning of July blessing the use of qualified longevity annuity contracts, or “QLAC’s,” a lot of people have been wondering when and where they can buy one. Per the last paragraph of my September 15th “Don’t Expect to See QLAC’s Soon” post, speculation was that product launch may begin in the fourth quarter of this year.

The mystery is now behind us. The first QLAC to hit the market was recently released by AIG through American General Life Insurance Co with its American Pathway deferred income annuity. AIG enjoys overall high ratings from independent ratings agencies, including A+, or strong, ratings from Standard & Poor’s and Fitch Ratings, A, or excellent, from A.M. Best Company, and A2, or good, from Moody’s Investors Service.

What’s Different about QLACs?

Subject to their current investment limitation of the lesser of $125,000 or 25% of one’s retirement plan balance, QLACs offer two distinct advantages over other investment vehicles for meeting part of a retiree’s income needs as follows:

  1. A portion of retirement assets exposed to stock market declines can be exchanged for a predictable sustainable lifetime income stream beginning at a specific date up to age 85.
  2. Can defer income taxation of a portion of retirement plan balances for up to 15 years with its exemption from the required minimum distribution, or “RMD,” rules, that otherwise require taking minimum distributions from retirement plans beginning by April 1st of the year following the year that you turn 70-1/2.

Predictable Sustainable Lifetime Income Stream

QLACs are a special type of deferred income annuity, or “DIA.” A DIA is an annuity from which annuitization begins at least 12 months after the date of purchase in exchange for a lump sum or series of periodic payments. The annuitization can be for a term certain or lifetime, depending upon the terms of the annuity contract.

Fixed income annuities, including lifetime DIAs, have previously been allowed to be included in retirement plans provided that payments (a) begin by April 1st of the year following the year that the owner turns 70-1/2 and (b) are structured so that they will be completed distributed over the life expectancies of the owner and the owner’s beneficiary.

QLACs extend the potential income start date of retirement plan assets allocated to them to age 85. In addition to predictable sustainable lifetime income, this enables individuals who have other sources of income to increase the amount of annual income that they will eventually receive from QLAC investments compared to non-QLAC DIAs held in retirement asset accounts.

Circumvent RMD Rules for a Portion of Retirement Plan Assets

Other than converting retirement plan assets to Roth IRAs which often triggers income tax liability at the time of conversion, there has been no other game in town for avoiding the RMD rules prior to QLAC’s. QLAC’s offer an opportunity to defer taxation on up to the lesser of $125,000 or 25% of one’s retirement plan balance at the time of investment.

Depending upon the timing of the QLAC investment and the income start date, the reduction in RMDs and potential income tax savings can be significant. Suppose that you’re 50 and your traditional IRA, which is your only retirement plan, has a value of $600,000. Let’s further assume that you invest $125,000 of your IRA in a QLAC with an income start date of 80.

Had you not invested $125,000 in a QLAC, assuming a 4% rate of return, this portion of your IRA would grow to $273,890 when you turn 70. The first year RMD for this value would be just under $10,000. The income tax savings from not withdrawing this amount of income from your IRA and potential greater amounts for the next ten years could be significant.

QLAC Market

With the release of AIG’s QLAC, the cat is out of the bag. Other insurance carriers are either in the process, or will soon be, requesting regulatory approval for their QLAC offerings. Per my September 15th post, it was, and still is, my personal opinion that widespread availability will not occur until well into 2015. Once this happens and consumers understand and appreciate the two distinct advantages that QLACs offer over other investment vehicles for meeting part of a retiree’s income needs, I believe that demand for this unique product will increase significantly.

Retirement Asset Planning Retirement Income Planning

Do You Want to RAP or Do You Prefer to RIP?

Retirement planning is unquestionably the most difficult type of goal-oriented financial planning. Most goal-based planning is straight-forward, solving for the amount, and frequency, of payments that need to be made to accumulate a sum of money at a future date using two assumptions: rate of return and inflation rate.

College education planning is a good example of the use of this methodology with a twist. Unlike other planning where the future value will be withdrawn in one lump sum, college costs are generally paid for over a series of four or five years. This complicates the planning since it requires the calculation of the present value of the future annual costs of college at the beginning of college, which in turn becomes the future value that must be accumulated.

Retirement Asset vs. Retirement Income Planning

Retirement planning is a whole other world. For starters, there are two stages of retirement planning, i.e., retirement asset planning (RAP) and retirement income planning (RIP). Until recent years, RAP was the only type of retirement planning and, as such, is what’s considered to be traditional retirement planning. RAP’s focus is the accumulation and “spending down” of assets. Although it’s more complicated, much of the methodology used is similar to other types of goal-oriented financial planning.

While RAP works well in the accumulation stage, it isn’t designed for calculating, and planning for, projected retirement income amounts that need to be available to pay for projected retirement expenses during various stages of retirement with unknown durations. As a result of the uncertainty of traditional RAP as a solution for providing a predictable income stream to match one’s financial needs in retirement, RIP was born.

Retirement Income Planning Issues

In addition to possessing the knowledge and experience of financial planners who specialize in RAP (RAPers?), retirement income planners (RIPers?) require an expanded skill set and associated knowledge to assist their clients with issues that are unique to RIP before and throughout a client’s retirement years. Planning issues extend well beyond asset accumulation and include, but aren’t limited to, the following:

  • Medicare
  • Long-term care
  • Social Security claiming strategies
  • Conversion of assets into sustainable income
  • Income tax minimization
  • Choosing strategies to address gaps in income
  • Retirement plan distribution options
  • Retirement housing decisions
  • Philanthropic
  • Estate transfer

Recommended Timeframe

Retirement planning is a time-sensitive and arduous task that requires a high level of discipline and commitment over the duration of one’s adult years, not to mention specialized expertise. Given the relatively short accumulation period compared to the potential duration of retirement complicated by an unknown escalating cost of living, the RAP phase should begin as soon as possible.

There are always competing goals, including saving for one’s first house and education planning, to mention a couple. All financial goals must be balanced against one another, keeping in mind that the ability to provide for your support – before and throughout retirement – supersedes all other goals.

RIP works best when it’s initiated long before you plan to retire. In addition to the nature and complexity of the various planning issues, this is very important given the fact that historically approximately 50% of all retirees retire before they plan on doing so. Given this reality, a 20-year pre-retirement RIP timeframe is recommended.

Finally, it’s important to keep in mind that RIP doesn’t end the day you retire. The success of your retirement years is dependent upon your ability to employ and adjust RIP strategies for the duration of your, and your spouse’s, if applicable, retirement years.

Do you want to RAP or do you prefer to RIP? As I hope you can appreciate, you need to do both at the appropriate time in your life in order to enjoy your retirement years on your terms.

See Planning to retire? Start with the right question

Retirement Income Planning

Accumulate Income, Not Assets, for Retirement

The personal savings rate in the United States has never been exemplary, averaging 6.83 percent from 1959 through 2013 as reported by the U.S. Bureau of Economic Analysis. Although we’re encouraged to save from an early age, it’s difficult for people to accumulate funds in a financial institution account without taking withdrawals from the account unless the reason for savings is to purchase a tangible product.

As an example, unless we receive a sizeable gift or inheritance, the down payment on our first house doesn’t fall from the sky. Most people in this situation need to diligently save a portion of each paycheck in savings and/or investment accounts to accumulate the necessary funds for this goal.

A tangible product such as a house is much easier to plan and save for than a more nebulous, loftier goal such as retirement. With the down payment on a house, the target is a fixed dollar lump sum in a defined number of years that’s typically within ten years at the most of the savings starting date. Once you accumulate the desired lump sum, it’s just a matter of time until you sign the reams of paperwork to purchase, and move into, your first house.

Saving for retirement is a totally different, and for most people, daunting challenge. For starters, unlike saving for the down payment on a first house, retirement isn’t a tangible goal. Contrary to the message in the popular 2010 ING commercial, “What’s Your Number?,” accumulation of a fixed dollar amount at an unspecified date isn’t the way that successful retirement planning is practiced today.

Although it’s easier for people to relate to, and plan for, saving a fixed dollar amount at a specified date, this way of thinking cannot, and shouldn’t be, applied to retirement planning. Without listing them all which is beyond the scope of this post, there are simply too many variables, many of which are beyond our control, when it comes to retirement planning to apply this type of approach. Suffice it to say that the potential for spending two to three dozen or more years in retirement without any predictable end date doesn’t lend itself to a traditional asset planning methodology.

Recognizing this fact and acknowledging that the financial side of retirement is expense-driven, retirement income planning was born. Rather than trying to accumulate a single lump sum that we don’t have a clue whether it will meet our financial needs for the duration of retirement, we need to accumulate streams of income that will match our projected expenses during various stages of retirement.

Since retirement isn’t a single event and is instead open-ended when it comes to duration, the income streams need to last for our lifetime. Like it or not, assuming that you don’t want to risk running out of money, lifetime needs to include the possibility that we may live to age 90 or longer.

Although it’s not simple due to the numerous interactive assumptions that must be made, it’s easier and more appealing to calculate individual years of projected expenses and match them up with projected income streams vs. simply saving a percentage of one’s income each year and not knowing if the resulting savings will meet our retirement needs.

Recognizing the foregoing facts, it should be easy to understand that saving 6.83% of your income in the absence of a sizeable inheritance isn’t going to be sufficient in most cases for funding all of our various financial goals, including retirement, especially if the start date for funding the latter goal is deferred to age 50 or later.

Knowing that when it comes to retirement planning you need to replace your employment income with other income that will pay for your future inflation-adjusted expenses for an indeterminable period of time may just motivate you to save a little more and start saving a little sooner than you would otherwise do.

Annuities Deferred Income Annuities Fixed Index Annuities Retirement Income Planning

Is Your Investment Advisor Afraid of Losing AUM?

When it comes to retirement income planning, one of my philosophies is a bird in the hand is worth two in the bush. As defined in Urban Dictionary, this expression means that it is better to have an advantage or opportunity that is certain than having one that is worth more but is not so certain.

One of the ways that I use this approach is to look for opportunities to convert what amounts to a sliver of a client’s portfolio into a deferred sustainable income stream beginning in a targeted year during my client’s planned retirement. The income stream, while it’s often for life, is sometimes for a specified period of time to close a projected retirement income gap (See Mind the Gap).

The opportunities to which I’m referring are sizeable abnormal increases in the stock market that inevitably are followed by market corrections, or downturns. Rather than celebrating what often proves to be temporary good fortune, when appropriate, I will recommend to my clients who need sustainable retirement income that they consider transferring a small portion of their investment portfolio into one or more new or existing fixed income annuities. These include fixed index annuities (“FIA’s”) with income riders, deferred income annuities (“DIA’s”), and single premium immediate annuities (“SPIA’s”).

This is a natural timely conversation that invariably makes sense to the clients to whom I recommend this approach since it is in their best interest. Furthermore, it’s an easy conversation for me to initiate since I specialize in retirement income planning, am a Retirement Income Certified Professional® (RICP®), CPA, CFP® professional, and a licensed insurance agent in addition to my firm being regulated as a Registered Investment Advisor (“RIA”). There’s no conflict of interest when I make the above recommendation to a client since, unlike most investment advisors, my income isn’t tied to a single compensation model.

The compensation model to which I’m referring is assets under management, or “AUM.” While many firms charge financial planning fees, the lion’s share of compensation earned by most traditional investment management firms is derived from AUM. As the name implies, the fee is typically calculated as a declining percentage of the value of a client’s investment portfolio. The greater the value of a portfolio, the smaller the percentage is that is applied to calculate the investment management fee. This is one of several compensation models offered by my firm.

Firms that are tied to an “AUM” compensation model generally don’t offer retirement income planning solutions that require insurance licensing and ongoing specialized insurance and annuity training. Most “AUM” driven firms are reluctant to refer clients to advisors like myself who offer a total retirement income planning approach since, in addition to the obvious revenue loss, this would be tantamount to an admission that they’re unable to provide a total retirement income planning solution.

An “AUM” model, while it’s appropriate for assisting clients with their retirement planning, i.e., asset accumulation, needs, isn’t designed for addressing lifetime sustainable income and other retirement income planning solutions. For clients seeking sustainable retirement income, it’s like trying to fit a square peg in a round hole.

Retirement Asset Planning Retirement Income Planning

Don’t Plan to Squeak By Into Retirement

Let’s face it. We’re a “just in time” society. With our busy lives, we do a lot of things at the last minute. Many people thrive on the adrenaline rush that often accompanies completion of a project right before its deadline.

Retirement income planning lesson #1: Don’t plan to squeak by into retirement. We simply cannot apply our “just in time” thinking to retirement. Retirement income planning is complicated, with too many things that can go wrong, many of them beyond our control. It requires a totally different mindset that runs contrary to the way most of us are use to thinking.

While there are no guarantees, a retirement income plan that’s begun and frequently revisited well before and throughout retirement provides the best opportunity for success. The basic goal of any retirement income plan is for your money to outlive you. When you see headlines like “Boomers’ Retirement Confidence Sinks,” you know this isn’t an easy goal to achieve.

Retirement income planning is especially tricky. It is quite different from retirement planning where the primary objective is accumulation of assets to obtain financial security throughout one’s retirement years. Traditional retirement planning isn’t enough to get you to the finish line in most cases today.

It’s too easy to have a false sense of comfort that one’s accumulated assets are sufficient to last for the duration of retirement only to be unpleasantly blindsided by the “sequence of returns” in the first several years of retirement. For those of you who aren’t familiar with this term, it is a series of investment portfolio returns, usually expressed annually, that has a direct impact on the longevity of an investment portfolio during the withdrawal stage. See The Sequence of Returns – The Roulette Wheel of Retirement that includes a comparison of three scenarios to help you better understand the importance of this risk to a retirement asset plan.

Retirement income planning takes retirement planning a step further. It requires planning for a predictable income stream from one’s assets, that when combined with other sources of income, is designed to meet an individual’s or family’s financial needs for the duration of retirement. This is a very important distinction. Locking in a predictable income stream in advance of one’s retirement reduces the impact of a down market in the early years of retirement.

A retirement income plan needs to have a secure floor of retirement income that will last for your, and, if applicable, your spouse’s lifetime. The timing and after-tax amount of the floor needs to correspond to ongoing and one-time predictable and unpredictable expenses that will fluctuate during different periods of retirement adjusted for inflation. To the extent that known income streams, e.g., Social Security, aren’t projected to be sufficient to cover expense needs, other sources of sustainable income need to be developed well in advance of retirement.

Don’t plan to squeak by into retirement. Trust me – there won’t be any adrenaline rush.

Retirement Income Planning

Ladder Your Retirement Income

“Don’t put all of your eggs in one basket.” This is a saying that’s often tossed around when it comes to retirement income planning. Usually it’s brought into the conversation to address different types of investments one should consider to generate retirement income.

While diversification is a fundamental principle when it comes to both pre- and post-retirement investment planning, income timing is just as important in retirement. The first thing that needs to be recognized is that retirement isn’t a single financial event. It’s a process that includes multiple stages, each with its own financial demands.

There are unique types of expenses associated with each stage. For example, there may be an emphasis on travel in the initial stage of retirement, potentially requiring a large initial budget for this item that may decline, and ultimately be eliminated, in later stages. Another example may be a mortgage that gets paid off during retirement. Finally, health and long-term care expenses tend to dominate the final stage. Nonrecurring, or infrequently recurring, expenses, such as car purchases and home improvements, need to also be considered.

Given the fact that income needs to cover expenses and there will be various types and amounts of expenses with different durations associated with each of the various stages, different streams, or ladders, of income need to be planned for to match one’s needs. Several types of income need to be analyzed to determine which ones will be best suited to match the projected expense needs of each stage.

When considering income types, it must always be kept in mind that after-tax income is used to pay for expenses. If the income source to be used to pay for a particular expense is a retirement account such as a 401(k) plan, a larger distribution will generally need to be taken from the plan than would be required from a nonretirement money market fund or from a Roth IRA account. Income tax planning is essential when it comes to income ladder design.

Complicating the income ladder design process is the decision regarding when to begin receiving Social Security. While Social Security can provide a solid base, or floor, to meet income needs for the duration of retirement, the amount of income that you will receive is dependent upon the age when you begin to receive your income. Given the fact that the amount will increase by 8% per year plus cost of living adjustments between full retirement age and age 70, it may make sense to defer the start date depending upon one’s retirement age, marital status, health condition, and other potential sources of income. The types, timing, and amounts of income ladders are directly affected by the Social Security start date decision.

Keeping in mind that successful retirement income planning includes planning, managing, and protecting income, an analysis of one’s income protection plan is also essential to the income ladder design process. As an example, to the extent that long-term care insurance has been purchased, a large income stream won’t be needed to pay for long-term care expenses. Funds will generally be needed, however, to pay for long-term care insurance premiums throughout retirement unless a claim arises.

As you can see, retirement isn’t a smooth ride whereby you can plan for the same amount of expenses each year increased by an inflation factor. Given this fact, an analysis of different types of projected expenses, including amounts and timing of each, is critical, followed by the design of an after-tax income ladder plan to match your expense needs.

Annuities Deferred Income Annuities Fixed Index Annuities

Invest in DIA to Fund LTCI Premiums When Retired – Part 4 of 4

The first three posts in this series discussed five differences between fixed index annuities (“FIA’s”) with income riders and deferred income annuities (“DIA’s”) that will influence which retirement income planning strategy is preferable for funding long-term care insurance (“LTCI”) premiums in a given situation. If you haven’t done so already, I would recommend that you read each of these posts.

This week’s post presents a sample case to illustrate the use of a FIA with an income rider vs. a DIA to fund LTCI premiums during retirement.


As with all financial illustrations, assumptions are key. A change in any single assumption will affect the results. The following is a list of assumptions used in the sample case:

  1. 55-year old, single individual
  2. Planned retirement start age of 68
  3. Life expectancy to age 90
  4. Current annual LTCI premium of $4,000 payable for life
  5. Need to plan for infrequent, although potentially double-digit percentage increases in LTCI premium at unknown points in time
  6. Given assumptions #4 and #5, plan for annual pre-tax income withdrawals of approximately $6,000 beginning at retirement age
  7. Solve for single lump sum investment at age 55 that will provide needed income
  8. Investment will come from a nonqualified, i.e., nonretirement, investment account
  9. One investment option is a fixed index annuity (“FIA”) with an income rider with lifetime income withdrawals beginning at age 68.
  10. Second investment option is a deferred income annuity (“DIA”) with no death benefit and lifetime income payout beginning at age 68.
  11. FIA premium bonus of 10%
  12. FIA annual return of 3%
  13. FIA income rider charge of 0.95% of income rider value otherwise known as the guaranteed minimum withdrawal benefit (“GMWB”)
  14. No withdrawals are taken from the FIA other than the income withdrawals.
  15. All investments are purchased from highly-rated life insurance companies known for providing innovative and competitive retirement income planning solutions.

Investment Amount

The first thing that needs to be solved for is the amount of investment that must be made at the individual’s age 55 in order to produce lifetime annual income of approximately $6,000 beginning at age 68. The goal is to minimize the amount of funds needed for the investment while choosing a strategy from a highly-rated insurance company that’s known for providing innovative and competitive retirement income planning solutions.

It turns out that an investment of $50,000 to $65,000 is needed to produce lifetime annual income of approximately $6,000 beginning at age 68. Given the fact that my goal as a retirement income planner is to use the smallest amount of investment for a fixed income annuity to produce a targeted income stream in order to preserve the remainder of a client’s investment portfolio for my client’s other financial goals, the amount of the investment needed is $50,000.


There are three items we will examine to compare the results between investing $50,000 in a FIA with an income rider vs. a DIA to fund LTCI premiums during retirement. They are as follows:

  • Annual gross income
  • Annual taxable income
  • Value/death benefit

Annual Gross Income

Per the Exhibit, the annual payout, or gross income, from the FIA is $5,764, or $236 less than the annual gross income of $6,000 from the DIA. This equates to a total of $5,428 for the 23 years of payouts from age 68 through age 90.

Annual Taxable Income

If the investment was made in a retirement account like a traditional IRA and assuming there have been no nondeductible contributions made to the IRA, 100% of the income would be taxable. This would be the case for both the FIA or DIA.

As stated in assumption #8, the investment will come from a nonqualified, i.e., nonretirement, investment account. Per Part 2 of this series, this makes a difference when it comes to taxation of the withdrawals. Per the Exhibit, 100% of the annual FIA income of $5,764 is fully taxable vs. $3,066 of the DIA income. This is because the DIA, unlike the FIA, is being annuitized and approximately 50% of each income payment is nontaxable as a return of principal. Over the course of 23 years of payouts, this results in $62,054 of additional taxable income for the FIA vs. the DIA.

The amount of income tax liability resulting from the additional taxable income from the FIA will be dependent upon several factors that will vary each year, including (a) types, and amounts, of other income, (b) amount of Social Security income, (c) potential losses, (d) adjusted gross income, (e) itemized deductions, (f) marginal tax bracket, and (g) applicable state income tax law.

Value/Death Benefit

While the present value of the future income stream of a DIA represents an asset, you generally won’t receive an annual statement from the life insurance company showing you the value of your investment. In addition, while some DIA’s will pay a death benefit in the event that the annuitant dies prior to receiving income, per assumption #10, this isn’t the case in this situation. Consequently, the DIA column of the “Value/Death Benefit” section of the Exhibit is $0 for each year of the analysis.

On the other hand, there’s a projected value for the FIA from age 55 through age 79. This value is also the amount that would be paid to the FIA’s beneficiaries in the event of death. There’s a projected increase in value each year during the accumulation stage between age 55 and 67 equal to the net difference between the assumed annual return of 3% and the income rider charge of 0.95% of the income rider value.

Per the Exhibit, the projected value/death benefit increases from $56,278 at age 55 to $68,510 at age 67. Although the assumed premium bonus of 10% is on the high side these days, this is reasonable given the fact that FIA values never decrease as a result of negative performance of underlying indexes, the assumed rate of return of 3% is reasonable in today’s low index cap rate environment, and the assumed income rider charge of 0.95% of the income rider value is on the upper end of what’s prevalent in the industry. The projected value/death benefit decreases each year from age 68 to age 79 until it reaches $0 beginning at age 80 as a result of the annual income withdrawals of $5,764.


As discussed in Parts 1 – 3 of this series, there are five important differences between FIA’s with income riders and DIA’s that will influence which retirement income planning strategy is preferable for funding LTCI premiums during retirement in a given situation. Two of the differences, income start date flexibility and income increase provision, haven’t been addressed in this post.

In addition to the five differences, the amount of the investment required to produce a targeted lifetime annual income amount to pay LTCI premiums, including potential increases, will differ depending upon the particular FIA or DIA strategy used. In the illustrated case, which isn’t uncommon today, an investment of $50,000 resulted in an almost identical lifetime income payout whether a FIA with an income rider or a DIA is used.

As illustrated, the taxable income associated with a DIA in a nonqualified environment is much less compared to a FIA. As previously discussed, the amount of tax savings resulting from the reduced taxable income will depend upon an analysis of several factors and will vary each year. Ignoring the potential income tax savings resulting from the tax-favored DIA payouts, the FIA with income rider would be the preferred investment choice for many individuals in this case given the presence, duration, and projected amount of, the investment value/death benefit.

The FIA edge is reinforced by the fact that, unlike most traditional DIA’s, the income start date and associated annual lifetime income payout amount for FIA’s is flexible. This would be an important consideration in the event that the year of retirement changes. Furthermore, this is quite possible given the fact that the individual is 13 years away from her projected retirement year.

As emphasized throughout this series, the purchase of LTCI needs to be a lifetime commitment. Planning for the potential purchase of a LTCI policy should be included as part of the retirement income planning process to determine the sources of income that will be used to pay for LTCI throughout retirement. Whether it’s a FIA with an income rider, a DIA, or some other planning strategy that’s used for this purpose will depend on the particular situation.

Annuities Fixed Index Annuities

Why Isn’t the Value of Your Income Stream Shown on Your Fixed Index Annuity Statement?

Last week’s post made the point that, in addition to the accumulation value of a fixed index annuity (“FIA”), there’s a value that can be calculated and attached to the future income stream from an income rider. Furthermore, unlike the accumulation value of your FIA that will change over time, unless you make additional investments or take non-income withdrawals, the amount of your lifetime income withdrawals are predetermined and are contractually guaranteed.

So if the amounts of lifetime income withdrawals are known at the time of purchase of your FIA, why don’t life insurance companies show the present value of the withdrawals on annual statements? The reason it’s not done is because there are several unknowns throughout the life of the contract that can affect the amount and duration of the income payout. There are two types of unknowns:  amount and duration variables.

Amount Variables

There are two variables that can increase or decrease the lifetime retirement payments (“LRP”) from an FIA:

  1. Additional investments
  2. Non-income withdrawals

Additional investments will increase LRP’s while non-income withdrawals will decrease LRP’s. In addition, the timing of additional investments and non-income withdrawals relative to the issue date will directly affect the LRP amount.

Additional Investments

Generally speaking, the sooner that additional funds are added to an existing FIA contract, the larger the income payout. This can happen in two different ways as follows:

  1. The sooner additional investments are made, the more time there is for the funds to increase the income account value and the ultimate LRP.
  2. To the extent that the FIA offers a premium bonus and the premium bonus provision applies to additional investments, this will also increase the income account value and LRP.

Non-Income Withdrawals

Timing of non-income withdrawals will also affect the LRP amount. This can happen in three different ways as follows:

  1. The sooner that the withdrawals occur, there will be a reduced income account value growing for a longer period of time.
  2. The sooner withdrawals occur, the greater the surrender charge which will increase the withdrawal amount and decrease the income account value and LRP.
  3. To the extent that a premium bonus has been paid, non-income withdrawals will result in a recapture of part, or all, of the premium bonus if they occur during a stated period of time, generally the first ten years of the contract, which will in turn reduce the income account value and LRP.

Duration Variables

Let’s assume that your FIA will never have any additional investment or non-income withdrawal transactions. In this case, the LRP’s will be the amounts beginning at different ages per the illustration that was prepared for you when you purchased your FIA. Why doesn’t your FIA statement show the present value of your LRP in this situation?

The answer is unknown duration. While the LRP amount is known, its duration isn’t. FIA income withdrawal amounts are paid for life and no one knows when you’re going to die. If you’re married, payments are made for the duration of the lives of both spouses and no one knows when the surviving spouse will die.

Annuities Deferred Income Annuities Fixed Index Annuities

FIAs With Income Riders vs. DIAs: Which is Right for You? – Part 5 of 5

The first four parts of this series compared and contrasted the features available in two major types of fixed income annuities that defer the payment of their income, i.e., fixed index annuities (“FIAs”) with income riders and deferred income annuities (“DIAs”). So now that we’ve thoroughly analyzed both of these excellent retirement income planning tools, which is right for you?

The answer to this question depends upon your retirement income planning needs. The ideal retirement income planning strategy is one that will generate one or more guaranteed streams of income that will close the gap between projected expenses and projected existing sources of income with the smallest investment. Whether FIA’s or DIA’s or a combination of both strategies, will achieve this goal, will be dictated by the unique facts in a given situation.

Whenever possible, multiple FIA and DIA illustrations should be prepared to determine which strategy or strategies makes the most sense for a particular case. As discussed in the first four parts of this series, while FIAs and DIAs have much in common, each has features not found in the other.

Assuming that a similar amount of income will be produced whether a FIA or a DIA is used, the meshing of the unique features associated with each of the two types of fixed income annuities with the requirements of a particular retirement income plan will dictate what’s best for the plan. As an example, if income start date flexibility is important, a FIA will generally fit the bill. If, on the other hand, inflation-adjusted income is required over a specified term, e.g., from age 65 – 75, a DIA may be the best solution.

The presence of an accumulation value and associated built-in death benefit with FIA’s that’s not available with DIA’s often tips the scale in favor of FIAs. This is further reinforced when lifetime, vs. a specified term, income is important.

Cost is another factor that needs to be considered when comparing FIAs with income riders to DIA’s. DIA’s, as a stand-alone income-producing product, have no upfront or ongoing cost associated with them. Since the benefits of guaranteed income associated with FIA’s can generally only be obtained by purchasing an optional income rider, there’s an annual charge that’s assessed and deducted from a FIA’s accumulation value for this rider.

There are two other things to keep in mind when comparing FIAs with DIAs. Unlike FIAs with income riders, which are currently offered by numerous life insurance carriers with 169 products currently on the market, there are only a handful of carriers that offer DIA’s. One of the leading carriers, Hartford Financial Services Group, recently agreed to sell its units that develop, market, and distribute new versions of retirement income products.

A second thing to keep in mind is the ongoing tweaking of existing products and development of new products in response to marketplace demands. Of note, one of the top-rated carriers with a longstanding history introduced an innovative DIA within the last year that allows for ongoing investments as well as a flexible income start date, both features of which weren’t previously available with traditional DIA’s.

As you can see, the decision between FIAs with income riders vs. DIAs is complicated, to say the least. Determining what makes sense for you requires the skills and knowledge of an experienced retirement income planner who routinely works with these and other retirement income planning strategies.

Annuities Deferred Income Annuities Fixed Index Annuities

FIAs With Income Riders vs. DIAs: Which is Right for You? – Part 3 of 5

I hope that you’re enjoying this series so far comparing two innovative retirement income planning tools – fixed index annuities (“FIAs”) with income riders and deferred income annuities (“DIAs”). Of the 12 features offered by FIAs with income riders that are listed in Part 1, we’ve looked at three features that are also offered by DIAs, and five that aren’t applicable to DIAs.

This post will discuss the remaining four features that are applicable to DIAs on a limited basis. They are as follows:

  1. Known future income amount at time of initial and ongoing investments
  2. Flexible income start date
  3. Greater income amount the longer you defer your income start date
  4. Death benefit

Known Future Income Amount at Time of Initial and Ongoing Investments

One of the really cool things about fixed income annuities from a retirement income planning perspective is the ability to structure a guaranteed (subject to the claims paying ability of individual life insurance companies) income stream to match one’s income needs. In the case of both FIA’s with income riders and DIA’s, the amount of the future income stream is known at the time of initial and ongoing investments.

When you purchase a DIA, a known amount of income, with or without an annual inflation factor, will be paid to you as an annuity beginning at a specified future date for either a specified number of months or for life, either single or joint as applicable. With traditional DIA’s, you make a one-time investment; however, there are a handful of products that offer you the ability to make ongoing investments.

Unlike traditional DIA’s where you generally make a single investment and you receive a specified amount of income beginning at a specified date, FIA’s with income riders have more variations. For one thing, assuming you’re working with a flexible– vs. a single-premium FIA, you have the ability to make ongoing investments in a single FIA. In addition, the income start date, which will be discussed in the next section, is flexible. While the future income amount is known at the time of initial and ongoing investments, both of these variables combine to offer a much broader range of possibilities than a traditional DIA when it comes to the income withdrawal amount.

Flexible Income Start Date

All FIAs with income riders have a flexible income start date with the ability to begin income withdrawals either in the year of purchase or one year from the date of purchase assuming you’ve reached a specified age, generally 50. There’s no requirement with FIA income riders to commit to the income start date at the time of purchase, and, furthermore, you don’t have to ever start taking income withdrawals if you choose not to do so.

Per the previous section, traditional DIAs begin their income payouts at a specified future date. There are some nontraditional DIAs that provide for a flexible income start date similar to FIAs with income riders.

Greater Income Amount the Longer You Defer Your Income Start Date

With all fixed income annuities where the income isn’t payable during the first year, i.e., single premium immediate annuities, or “SPIAs,” the longer you defer your income start date, the greater the amount of income you will receive. This is true whether the income payment is for a fixed term, as it is with some DIAs, or if it’s for life.

FIAs with income riders, with their built-in flexible income start date, include this feature. In order to obtain this benefit with a traditional DIA, you need to choose a later income start date at the time of purchase.

Death Benefit

Income withdrawal is an optional rider with FIAs. The base product has an accumulation value that’s increased by initial and ongoing investments, premium bonuses, and interest credits and is decreased by withdrawals and surrender and income rider charges. To the extent that there’s accumulation value remaining upon the death of the owner(s), it’s paid to the contract’s beneficiaries as a death benefit.

Traditional DIAs may or may not include a death benefit prior to annuitization. Once annuitization occurs, there’s generally no death benefit payable. If you opt for a traditional DIA that includes a death benefit before annuitization, the amount of the benefit will generally be equal to your investment amount; however, the tradeoff will be a reduced income amount than would otherwise be payable by a similar product that doesn’t include a death benefit.

Annuities Deferred Income Annuities Fixed Index Annuities

FIAs With Income Riders vs. DIAs: Which is Right for You? – Part 2 of 5

As stated in Part 1 of this post, while fixed index annuities (“FIAs”) with income riders can be used to provide guaranteed (subject to the claims paying ability of individual life insurance companies) lifetime income beginning at a future date, they aren’t the only fixed income annuity game in town. Of the 12 features offered by FIA’s with an income rider that are listed in Part 1, three are offered by deferred income annuities (“DIAs”), four are applicable on a limited basis, and the remaining five aren’t applicable. The last group is the subject of this post.

The following is a list of the five features offered by FIAs that aren’t applicable to DIAs:

  1. Potential doubling of income amount to cover nursing home expense
  2. Investment value in addition to future income stream
  3. Protection from loss of principal
  4. Potential for increase in investment value
  5. Potential matching of percentage of investment amounts by financial institution

Potential Doubling of Income Amount to Cover Nursing Home Expense

The first feature, potential doubling of income amount to cover nursing home expense, isn’t a standard feature of FIAs with income riders. Of the 184 FIAs that currently offer guaranteed minimum withdrawal benefits (“GMWBs”), or income riders, 53, or less than one-third, include some type of long-term care benefit. When present, the amount of the benefit compared to the standard income amount, as well as qualification for this benefit, varies.

Investment Value in Addition to Future Income Stream

While DIAs and FIAs with income riders both offer the ideal retirement income feature of guaranteed (subject to the claims paying ability of individual life insurance companies) tax-deferred lifetime income, only FIAs also have a traditional investment value associated with them. Psychologically, this is comforting to investors who are uneasy with exchanging a lump sum of money “only” for an income stream who don’t understand the concept that the present value of the future income stream is an investment just like a brokerage account or any other investment asset.

Protection From Loss of Principal

Protection from loss of principal as well as features #4 and #5 are driven by feature #3, i.e., investment value in addition to a future income stream. The investment, or accumulation, value of FIAs, as it’s better known, will never decrease as a result of investment performance. It will either increase or remain unchanged on an annual or biennial basis, depending upon particular stock indexing strategies chosen. In the event of negative performance of a particular strategy, it will remain unchanged.

Potential for Increase of Investment Value

The investment, or accumulation, value of a FIA can increase to the extent that it’s allocated to one or more of the following three investment choices:

  1. Fixed account
  2. Traditional indexing method when the performance of the chosen index is positive
  3. Inverse performance trigger when the performance of the associated index is negative

The last choice, inverse performance trigger, isn’t a standard FIA indexing crediting option. Of the 253 FIAs on the market today, there are only 12 products available from two life insurance companies that offer this innovative strategy.

Potential Matching of Percentage of Investment Amount by Investment Institution

As previously stated, unlike DIAs that don’t have a traditional investment value associated with them, FIAs offer this feature. In addition, of the 253 FIAs available today, 130, or approximately one-half, have a percentage matching, or premium bonus, as it’s more commonly known, feature. A premium bonus is a fixed percentage of the investment in a FIA that’s added by some life insurance companies to the FIAs accumulation value during the first contract year and, sometimes, subsequent contract years, for a specified number of years.

As discussed in previous posts, the availability of this feature, as well as the bonus percentage amount when offered, shouldn’t be relied upon in and of itself to determine the suitability of a particular FIA in a given situation.

Annuities Fixed Index Annuities

When Should You Begin Your Lifetime Retirement Payout? Part 1 of 2

When you purchase a fixed index annuity (“FIA”) with an income rider, in addition to having an accumulation value that’s standard with every FIA, you purchase the right to receive a future lifetime income stream, or lifetime retirement payments (“LRP’s”). The income stream is payable over your life and potentially that of a spouse or other joint annuitant if applicable.

Although you’re not required to exercise the income rider, it behooves you to do so since there’s generally a cost associated with the rider. The income rider charge is deducted from the contract’s accumulation value. It’s calculated as either a percentage of the accumulation value or the income account value, sometimes referred to as the guaranteed minimum withdrawal benefit, or “GMWB,” with the calculation based on income account value for most riders.

When should you exercise your income rider and begin your lifetime retirement payout? In order to answer this question, you first need to know when your income rider allows you to start taking income withdrawals. Generally speaking, income riders allow you to begin taking income withdrawals either during the initial contract year or after the first contract year. In addition, most contracts won’t let you start withdrawing income until you attain a specific age, typically 50.

Assuming that the provisions of your income rider allow you to begin your income stream during or after the first contract year, should you turn on your LRP right away? Generally speaking, this isn’t a good strategy. Similar to Social Security where you have the right to receive benefits beginning at age 62, unless you have no other source of income, it generally doesn’t make sense to do so.

With both Social Security and FIA income riders, the longer you defer your income start date, the greater your income will be. Unlike Social Security benefits which max out at age 70 excluding cost of living increases, as a general rule, FIA income rider beginning withdrawal amounts continue to increase well beyond age 70.

The LRP increase amount is dependent upon two factors: (1) Number of years remaining in the accumulation phase of the income account value and (2) Age at which withdrawal percentages no longer increase. Once the income account accumulation phase ends, LRP increases will generally occur every five years since the withdrawal percentages of most income riders are based on five-year age bands, e.g. 75 – 79, 80 – 84, etc. The final age band of some income riders is 80+ up to 95-99 for one of the income riders available through my life insurance agency.

Even though the beginning LRP continues to grow until age 80 or beyond, should you wait this long to exercise your income rider? In most situations, the answer is often “no,” however, if you purchased your FIA at an advanced age, say 70 or older, it will generally behoove you to defer your income start date in order to complete your income account value accumulation phase and, in the process, optimize your benefit amount, assuming you’re in good health. As discussed in the April 2, 2012 post, How is Your Fixed Index Annuity’s Income Account Value Calculated?, if income hasn’t been started, the interest period of the accumulation phase is generally a certain number of years, typically ten, although it can be limited by a specified age, e.g., 85 or 90.