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 Unlike other planning where the future value will be withdrawn in one lump sum, college costs are generally paid for over a series of four or five years.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

Annuities Fixed Index Annuities

Fixed Index Annuity Income Rider Charge – Is It Worth It? – Part 2 of 2

Part 1 of this post explained the benefits of attaching an income rider to a fixed index annuity (“FIA”). It also discussed the charge for this rider, including how it’s calculated. Now we come to the crux of the matter – is a FIA income rider charge worth it?

Before answering this question, I want to make it clear that the charge doesn’t reduce the lifetime income, or lifetime retirement paycheck (“LRP”) amount that you will receive. It’s deducted from the accumulation value of your FIA, or value of your FIA before any applicable surrender charges. As explained in Part 1, the income account value is used to calculate the amount of your LRP and is separate and apart from the accumulation value of your annuity contract.

Not to state the obvious, however, when you purchase something for yourself, you generally do so only if you plan on using it or benefiting from it in some way. This applies to a FIA income rider. The reason that people purchase a FIA with an income rider is to obtain the security that no matter what happens with the rest of their investment portfolio, subject to individual life insurance company claims-paying abilities, they will receive guaranteed lifetime income beginning at a flexible income start date, with the amount of income increasing the longer the start date is deferred.

Furthermore, per Part 1, one of the five benefits offered by an income rider is the ability to calculate the LRP amount that you will receive beginning on a specified future date on the date of purchase. When you invest in a FIA and tack on an optional income rider, your retirement income planner should be able to show you (a) the amount of annual income that you will receive beginning on different dates with specified initial and additional purchase amounts and (b) the amount of your projected retirement income need that will be met by your FIA income.

Assuming your goal is to receive a specific amount of income each year beginning at a specified future date, you won’t withdraw funds from the accumulation value of your FIA before or after your income start date. If you do so, the income account value will decrease by the amount of your withdrawals, decreasing your LRP amount.

Assuming you won’t be withdrawing funds from the accumulation value of your FIA and you will only be using your FIA to generate lifetime income, the accumulation value will be of secondary importance to you during your lifetime. If there’s a chance that you may take withdrawals from your accumulation value, you shouldn’t be purchasing an FIA with an income rider.

With an income rider, once you start receiving income from your contract, you will continue to do so for the rest of your life even if the accumulation value has been reduced to $0 as a result of income withdrawals and income rider charges. Assuming that you use your income rider as intended, receiving lifetime income without taking any withdrawals from the accumulation value of your contract, the primary benefit of your contract’s accumulation value is as a potential death benefit to your beneficiaries. Keeping in mind that income distributions reduce accumulation value, the latter may be minimal or potentially depleted in the event that there have been ongoing income distributions for many years.

Assuming (a) you value the five benefits of a FIA income rider presented in Part 1, (b) you understand that the income rider charge won’t affect the amount of your lifetime income, (c) you recognize that the accumulation value is of secondary importance, and (d) the income rider charge is competitive with other FIA income rider charges assessed by similarly-rated life insurance carriers that will pay a similar amount of income, you will probably conclude that the income rider charge is a small price to pay to obtain the unique combination of benefits offered by a FIA income rider.

Retirement Income Planning

It’s All About Timing

No matter how many times we see magic shows, inevitably, in response to a professionally-performed magic trick, we blurt out, “How did he do that?” Even though we know that the magician’s goal is to elicit this reaction, we’re nonetheless amazed by it.

What’s more astounding is that we’re amazed despite the fact that we all know the secret to each and every trick – timing. The use of precise timing in the performance of a planned sequence of events is responsible for creating the illusion that’s played out before our eyes time and time again by a professional magician.

It’s no different when it comes to successful retirement income planning. It’s all about timing. Anyone can stop working permanently and say they’re retired. Successful financial retirement, however, requires the performance of a planned sequence of events before and throughout retirement.

As you may have noticed, unlike my description of the magic process, I omitted the word “precise” before “planned sequence of events.” This was intentional since, unlike magic where the magician has control over the outcome of his tricks provided his timing is precise, this is irrelevant when it comes to retirement income planning. There are too many variables beyond our control, e.g., longevity, inflation, etc., that affect the outcome of a retirement income plan, making the use of precise timing meaningless.

Nonetheless, the performance of a planned sequence of events in a timely manner is essential to increasing the likelihood of a successful financial retirement. It’s a complicated ongoing process that requires planning, managing, and protecting retirement income. Given the potential duration of retirement of up to 25+ years, the sooner the process is begun, the more likelihood of a successful result.

As a retirement income planner, my ability to perform “magic” for a client is dependent upon my ability to understand my client’s financial needs and my client’s willingness to allow me to implement and maintain a plan that includes the performance of a planned sequence of events that will increase the likeliness of my client meeting his/her financial needs throughout retirement. Timing is everything.

Fixed Index Annuities Retirement Income Planning

Cap Rates Are Secondary When Optimizing Retirement Income

If you’ve been reading Retirement Income Visions™ for any length of time, you know that I’m a fan of fixed index annuities (“FIA’s”) with income riders, or guaranteed minimum withdrawal benefit’s (“GMWB’s”) as part of a retirement income planning solution in the right situation. The ability to create a predictable retirement paycheck with a flexible start date that includes an investment component with upside potential, downside protection, and a potential death benefit is unparalleled in the investment and insurance world.

For you horse race fans, that’s what I call hitting the trifecta! Unlike horse race betting, when you invest in a FIA with an income rider with a highly-rated life insurance company, while the results aren’t guaranteed since they’re subject to the claims paying ability of each individual insurance carrier, your bet is pretty secure given the stellar historical claims paying experience of the life insurance industry.

It’s important to understand that very few FIA’s that are sold today include GMWB’s as part of their base product. If you need sustainable lifetime income beginning at a specific age, you will generally need to purchase an optional income rider when you complete your FIA application. Only about two-thirds of FIA’s on the market today offer an optional income rider. An income rider charge of between 0.75% and 0.95% of your contract’s income account value will generally be deducted from your contract’s accumulation value each year.

Assuming that your goal is to maximize sustainable lifetime income, once you, or more likely your retirement income planner, narrows your FIA search to those that include a GMWB or optional income rider, illustrations need to be prepared for multiple products offered by highly-rated life insurance companies that are well-established in the FIA business to determine which ones will provide you with the greatest amount of income for your desired investment amount(s) beginning at various ages.

This is a difficult task due to the fact that there are several variables that are used in the calculation of annual income that will be received from a particular FIA. After analyzing hundreds of FIA illustrations, trust me, it requires a lot of skill, hands-on experience, and access to dozens of options, including appointment as a licensed life insurance agent with multiple life insurance carriers, in order to offer an independent optimal recommendation for a particular situation. One product may provide greater income beginning at age 62, however, another one may be more suitable if you don’t plan on taking withdrawals until age 70.

What about cap rates? Assuming your goal isn’t to create a predictable retirement paycheck, there’s no need to purchase a FIA with a GMWB or income rider. If this is your situation, you should be paying close attention to the caps, or limits, on interest that will be credited to your account each year that are associated with various indexing methods offered by a particular FIA depending upon its performance during the previous contract year.

If, on the other hand, your primary goal is to optimize lifetime income beginning at a particular age, cap rates, while important, should be a secondary consideration when choosing a FIA. While higher cap rates may result in a greater accumulation value that may more seamlessly absorb income rider charges associated with good market performance and may potentially result in a greater death benefit, they generally won’t affect the amount of lifetime income that you will ultimately receive from a particular FIA. This is due to the fact that the lifetime income calculation of most FIA’s is generally independent of indexing method performance. Furthermore, even if there’s no remaining accumulation value in your contract as a result of income withdrawals over many years, you will continue to receive your income so long as you’re alive.

While cap rates are often hyped by life insurance companies when promoting FIA’s, they should be a secondary consideration when your primary goal is to create and optimize a predictable retirement paycheck beginning at a specific age. If this is your situation, you or your retirement income planner should be devoting the majority of your research to locating those FIA’s offered by highly-rated life insurance companies that are well-established in the FIA business that include a GMWB or income rider that will enable you to achieve your goal.


Immediate Annuities – Where’s the Planning?

As a retirement income planner, in addition to the Retirement Income Visions™ blog posts and MarketWatch RetireMentors articles that I write, I read a lot of retirement planning and retirement income planning (If you’ve been reading my articles, you know there’s a distinct difference between the two disciplines) articles written by other writers.

While I’m happy to see that immediate annuities are often recommended as a potential retirement income planning strategy, I get concerned when they’re touted as the only income solution, especially in today’s low-interest-rate environment.

I have discovered after questioning writers about their recommendation that knowledge about other types of income annuities is lacking in many cases.

An immediate annuity is a fixed income annuity for which annuitization begins one month after date of purchase with a single premium. For those of you who aren’t familiar with, or need to brush up on your understanding of, annuities, please refer to the following five terms that are defined in the Glossary of Terms: annuity, annuitization, fixed annuity, fixed income annuity, and immediate annuity.

From a planning perspective, assuming there isn’t an existing retirement income plan in place that includes deferred fixed income annuities, it’s my belief that the recommendation of an immediate annuity as the only income solution in many cases demonstrates a lack of planning and understanding about other types of annuity income strategies, including how they can interact to optimize an individual or family’s sustainable income.

By definition, annuitization, or the structured payout, of an immediate annuity begins one month after date of purchase of the annuity contract. Assuming that a recommendation is made today to purchase an immediate annuity with a lifetime payout, the lack of income deferral opportunity, combined with today’s low interest rate environment, is generally going to result in a relatively small monthly payment. While the payment is guaranteed by each individual life insurance carrier, subject to each carrier’s claims paying ability, and is subject to favorable income tax treatment, it nonetheless will generally be modest at best.

Assuming that you have at least five years until retirement, you have the ability to implement retirement income planning strategies that include fixed income annuities with deferred payments as part of your plan. This includes deferred income annuities (“DIA’s”) and fixed index annuities (“FIA’s) with guaranteed lifetime withdrawal benefits (“GLWB’s”), generally offered as income riders. Please refer to these terms in the Glossary of Terms if you’re not familiar with them. In addition, you may want to read the five-part series, FIA’s With Income Riders vs. DIA’s: Which is Right for You?

The deferred payment nature of DIA’s and FIA’s with income riders provides insurance carriers with the opportunity to invest your premium for an extended period of time as defined by each annuity contract. How does this benefit you? For starters, there will be no taxation of your investment between the date of your purchase and the date that you begin your withdrawals, otherwise known as tax deferral. More importantly, the deferral period provides you with the ability to receive a larger monthly income stream than a stand-alone immediate annuity solution. Furthermore, the timing of the commencement and amount of your payments can be customized to meet your financial needs.

An immediate annuity, when presented as the only income strategy, is generally not appropriate as a retirement income planning solution in many cases in my opinion. A holistic retirement income plan that includes deferred fixed income annuities is often a preferable alternative.

Annuities Deferred Income Annuities Fixed Index Annuities Longevity Insurance Retirement Income Planning

Insure Your Longevity

When people hear the term, “longevity insurance,” they immediately conjure up images of insurance agents trying to sell them an insurance policy. Longevity insurance isn’t a product in and of itself. It is instead one application of a couple of different types of fixed income annuity products offered by life insurance companies.

The Need for Longevity Insurance

It’s been my personal and professional experience that people generally underestimate how long they will live. Not only is it common to live to age 80, it isn’t unusual to survive to age 90 and even to 100. According to a March, 2012 report, The 2011 Risks and Process of Retirement Survey, prepared for the Society of Actuaries, when a couple reaches 65, there’s a 10% chance that at least one of the individuals will live to 100. There’s a 1% chance that one spouse will reach 107. More than half of retirees and pre-retirees underestimate the age to which a person of his or her age and gender can expect to live.

Given the foregoing facts, combined with the uncertainty of the sustainability of a traditional investment portfolio as a source of retirement income, there’s a need for a guaranteed lifetime income solution for the latter stage of one’s life. The income amount, when combined with other sources of sustainable income, needs to be sufficient to meet projected known and unforeseen expenses for an indefinite period of time.

Products Providing Longevity Insurance

There are two types of fixed income annuities that can be used for the purpose of longevity insurance: deferred income annuities (“DIA’s”) and fixed index annuities (“FIA’s”) with income riders. Both provide the ability to (a) receive income beginning in a future year, and (b) have the income be paid for the remainder of one’s life and a spouse’s life if married.

Deferred Income Annuities

Although DIA’s are currently offered by only a handful of life insurance companies, they’re the solution that’s typically been touted for longevity insurance up until now. Like single premium immediate annuities, or “SPIA’s,” DIA’s pay periodic income for a specified period of time or over one’s lifetime or joint lifetimes as applicable. Unlike SPIA’s which begin payments one month after date of purchase, the start date of DIA payments is contractually defined and is deferred for at least 13 months. The longer the income start date is delayed, the lower the premium, or investment, required to provide a specified amount of income.

Although DIA’s can be purchased for a specified term, e.g., ten years, when used as longevity insurance, the payout on DIA’s often starts in one’s 80’s and is for life. Depending upon the age at which a DIA is purchased, the premium can be a relatively small amount compared to the potential lifetime income that may be received.

Fixed Index Annuities With Income Riders

For those individuals who don’t want to be locked into a fixed starting date, in addition to providing an accumulation value, FIA’s with income riders offer greater flexibility than DIA’s. With FIA’s, which are more readily available than DIA’s, there’s no contractual income start date. Income withdrawals can generally begin any time at least one year after the initial investment is made. The longer the start date is deferred, the greater the amount of lifetime income. The start date can be targeted when the investment is purchased based on the amount and timing of initial and projected ongoing investments and desired amount of income. A flexible, vs. single, premium FIA is required in order to invest additional funds.

Depending upon one’s needs and marketplace availability, it may make sense to use a combination of DIA’s and FIA’s with income riders. and potentially multiple products within each category, to meet deferred lifetime income needs. As with all things of this nature, a thorough analysis should be prepared by a professional retirement income planner to determine the solution that will best meet your needs.

Retirement Income Planning

Plan for a Range of Retirement Ages

It’s widely agreed that age 65 is no longer the magic retirement age. According to the U.S. Bureau of the Census Current Population Survey, 65 or 66 was the average retirement age for men from the early 60’s through the mid 70’s. It dropped to age 64 in the late 70’s, 63 in the 80’s, and 62 from 1989 until 1995. It then increased to 63 from 1997 through 2007 before it returned to age 64 in 2009.

The average retirement age for women has historically been younger than for men. There was a 6 to 13-year age difference from the early 60’s through the mid 80’s when the average age for women ranged from 53 to 57. It wasn’t until 1989 that the average retirement age for women climbed to 59, then 60 in 1995, 61 in 2003, and 62 in 2007. Since 1989, the spread between men and women’s average retirement age has held steady between two and three years.

You may be thinking, that’s pretty good – men are retiring at age 64 and women at 62. There are several things to keep in mind, however, when digesting these statistics:

  • These are average ages, with 50% of individuals retiring at a later age.
  • When someone retires, it isn’t always by choice and instead is often dictated by layoffs or health issues.
  • Most people who retire don’t have a retirement income plan with multiple potential sources of sustainable income.
  • Many people who retire do so with minimal income with a reduced lifestyle compared to what they previously enjoyed.
  • The absence of a retirement income protection plan, including long-term care protection, is common.
  • With longer life expectancies, it’s becoming more challenging to not outlive your financial resources.

With traditional pension plans becoming rarer in the private sector, increasing starting age for collecting full Social Security benefits as well as other anticipated unfavorable changes to the Social Security system, the average retirement age for men and women is likely to continue its climb. Given this situation, planning to retire at age 65 isn’t realistic for most people.

Assuming that you want to do retirement income planning, what is the retirement age for which you should plan? I’m a firm believer, for many reasons which are beyond the scope of this post, that retirement income planning, more so than any other type of financial planning, needs to be dynamic and flexible. It’s important that you don’t pigeon hole yourself into one specific age and instead plan for a range of possible retirement ages. A five-year range is generally appropriate, e.g., 64 to 68. In addition, this isn’t a one-time exercise. It should be reviewed and adjusted on a regular basis, preferably annually.

Don’t be guided and mislead by statistics. There’s no magic age at which you should retire. If you haven’t done so already, you need to hire a professional retirement income planner to assist you with the analysis and recommendations. You don’t want to make a mistake when it comes to calculating your ability to retire at a certain age since you probably won’t get a second chance once you retire.

Annuities Retirement Income Planning

Is It Time to Take Some Chips Off the Table?

For those of you looking forward to reading Part 2 of the New Tax Law – Don’t Let the Tax Tail Wag the Dog post, my apologies to you. It will be published next week. After the recent surge in stock prices with the notable exception of Apple, which has lost 265 points, or 38% of its value, in just four months from its September 21st high of 705.07 to its close of 439.88 this past Friday, I feel compelled to write and publish this post first.

I was in Las Vegas attending a professional conference last week which may have been the impetus for the title of this post. As an investment advisor, when I see the Dow Jones Industrial Average increase by 792 points, or 6%, from its December 31st close of 13,104.14 to Friday’s close of 13,895.98 in less than one month, including 13 out of 17 sessions when the closing price has exceeded that of the previous day with 7 consecutive daily increases through Friday, on top of a 7.3% increase in 2012, I take notice. The phrase “reversion to the mean” comes to mind.

As a retirement income planner, I look for windows of opportunity for my clients to transfer, what amounts to slivers of their investment portfolio in many cases, from the unpredictable fluctuations of the stock market to conservative investments that are designed to provide guaranteed income* payable over a specified period of time that they can depend on throughout retirement. This includes single premium immediate annuities (“SPIA’s”), deferred income annuities (“DIA’s”), and fixed index annuities (“FIA’s”) with income riders. Since my crystal ball shattered years ago, I don’t try to time the market to determine when it has peaked in order to recommend and perform this heroic service for my clients.

While my clients are unanimously very happy with the recent increased value of their portfolios, I know from many years of experience that this state of euphoria is often short-lived. The reality is that their equity allocation is more than what is targeted for their portfolio in several cases. As a result, the risk associated with their portfolio is greater than what is appropriate for their risk tolerance level. This is inevitably a ticking time bomb unless corrective action is taken in a timely manner.

Shifting a portion of a managed investment portfolio to guaranteed income* at opportune moments has proven to be a winning strategy for my clients within 20 years of, or in, retirement. They have everything to gain and nothing to lose. Each time that a client implements this recommendation, he/she accomplishes two important goals shared by all individuals doing retirement income planning: (a) portfolio risk reduction and (b) decreased likelihood of running out of money in retirement.

Although I haven’t done any formal large-scale studies, I can confidently state from personal and client experience that this generally results in reduced short- and long-term stress levels, fewer cases of insomnia, and less health issues in general for those individuals who implement this strategy compared to those who don’t. This unequivocally trumps the short-term euphoria associated with increased portfolio values in a bull market.

Let Apple’s recent experience be a lesson for us all. Don’t be afraid to take some chips off the table, especially when your retirement, health, and happiness are at stake.

*Subject to the claims-paying ability of individual insurance carriers

Social Security

Approaching 62? – Stop Before You Leap – Part 1 of 2

As I’ve dealt with clients and nonclients alike over the last three decades, one of my ongoing observations is the lack of formal and informal financial education we receive as a society when it comes to how to recognize and plan for critical life-changing financial events in our lives. This is especially true as it pertains to one of the most, if not the most, important financial decisions most of us will make during our lifetime, i.e., when to begin receiving Social Security retirement benefits.

By way of background, although you may apply to begin receiving Social Security retirement benefits at age 62, your benefit will increase each month that you defer your start date until age 70. While it’s tempting to turn on the faucet at age 62, this may not be the best age to begin receiving benefits if you’re concerned about maximizing and prolonging your retirement income stream and that of your spouse if you’re married.

The timing of the Social Security claiming age decision occurs at the crossroads of most peoples lives when many decisions need to be made that will affect the financial and emotional success of one’re retirement years. It comes at a time when:

  • The financial and psychological security of full-time employment will be ending in the near future for most people.
  • The sequence of investment returns can make or break one’s retirement if not properly planned for.
  • There will be a prolonged period of financial uncertainty without the associated safety of a paycheck, including unknown investment performance, inflation, and income tax rates.
  • Health begins to decline for many people with escalating health insurance premiums, potential higher out-of-pocket medical costs, and potential uncovered long-term care expense.

Given the far-reaching and long-term consequences of the Social Security claiming decision, it should be a high priority for anyone approaching age 62 to have a professional retirement income planner prepare an analysis as part of a retirement income plan to determine the optimal age to begin receiving Social Security retirement benefits.

The choice of a Social Security starting age will differ depending upon each person’s unique circumstances. This will become more evident when you read the reasons why the choice of your Social Security claiming age is so important in Part 2 of this post next week.

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 Long-Term Care

Invest in FIA to Fund LTCI Premiums When Retired – Part 2 of 2

Part 1 of this post alluded to a perfect storm awaiting many long-term care insurance (“LTCI”) policy owners when they retire, an analysis of which should be included as part of the planning process when the potential purchase of a LTCI policy is being considered. The perfect storm is as follows:

  • Due to potential sizeable ongoing benefits, LTCI premiums aren’t inexpensive.
  • Depending upon when a policy is purchased, LTCI premiums may need to be paid for 30 to 50 years.
  • While historically infrequent, LTCI premium increases can be significant.
  • Although it may be needed in one’s 50’s, long-term care is more often required in one’s 70’s, 80’s, or 90’s.
  • Premiums may be affordable when employed; however, this may not be the case when retired.

The last item in the list is critical. Given all of the foregoing items, when you purchase a LTCI policy, it needs to be a lifetime commitment. As part of this commitment, you need to have a plan in place for how you will pay for your LTCI premiums not only during your working years, but for the rest of your life.

Per last week’s post, one way to plan to pay for LTCI premiums during retirement is to purchase a fixed index annuity (“FIA”) with an income rider. Given the fact that the amount of lifetime income that you will receive beginning at various ages from a FIA with an income rider can be calculated at the time of purchase, this can be a good strategy to use for future LTCI premium funding. Specifically, you can determine the initial and ongoing investment amounts required to produce a targeted amount of income to match your LTCI premiums, including projected increases in same.

Let’s look at an example. Let’s assume that Ms. Nice, age 55 and single, is planning on retiring at age 68. Let’s further assume that she is currently, and is projected to be throughout retirement, in a 20% income tax bracket. Ms. Nice is considering the purchase of a LTCI policy with an annual premium of $4,000. This amount can comfortably be paid out of her current and projected employment earnings, however, this isn’t projected to be the case in retirement, especially with potential premium increases.

Ms. Nice’s retirement income planner, who specializes in planning, managing, and protecting retirement income, projects that she will need annual pre-tax income of $6,000 in retirement to pay for her LTCI premiums. This amount is projected to cover income tax liability on income allocated for LTCI premium payments plus modest premium increases.

One of the options that Ms. Nice’s retirement income planner proposes to her for providing her with the income she needs to pay her LTCI premiums throughout retirement is a FIA with an income rider. For the recommended FIA and income rider, by investing either (a) $54,000 today, or (b) $40,000 today plus $1,750 per year for the next 12 years, Ms. Nice will receive lifetime annual income of $6,000 beginning at age 68.

Given the fact that the purchase of LTCI needs to be a lifetime commitment and LTCI premiums increase with age, planning for the potential purchase of a LTCI policy should be included as part of the retirement income planning process. By taking this approach, you will increase the likelihood that your LTCI policy will be in force when you need it.

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What is a Retirement Income Planner?

Choosing the right fixed index annuity (“FIA”) with the right income rider for your situation requires that you first choose the right individual who specializes in this unique retirement income planning strategy. The conclusion of the post, Retirement Income Planner Key to Success When Investing in Fixed Index Annuities, was that the person you choose should be a professional retirement income planner.

What is a retirement income planner? Before answering this question, let’s start by stating what a retirement income planner isn’t. Although it’s possible that the same individual may perform both services, a retirement income planner isn’t the same thing as a retirement planner.

Simply stated, a retirement planner develops and manages strategies for building assets that are intended to be used for retirement. Retirement planners practice retirement asset planning, As defined in Retirement Income Visions™ Glossary, Retirement Asset Planning is:

The process of planning for the accumulation of sufficient assets to be used for retirement and “spending down” of those assets during one’s retirement years.

Retirement asset planning is all about accumulating assets. It begins when assets are earmarked for retirement, either by (a) the nature of the assets, e.g., qualified plans including 401(k) plans, or (b) dedicating nonqualified assets for retirement. By definition, retirement asset planning ends at retirement whether or not there are sufficient assets that will last for the duration of retirement.

Retirement income planning, on the other hand, begins during the asset accumulation process and ends at death. As defined in Retirement Income Visions™ Glossary, Retirement Income Planning is:

The process of 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.

Retirement income planning is practiced by retirement income planners. Per Retirement Income Visions™ Glossary, a Retirement Income Planner is:

An individual who is professionally trained, licensed, and experienced in developing and managing strategies for creating and optimizing retirement income to meet one’s financial needs for the duration of retirement.

“Income” and “duration of retirement” are the key words and phrases, respectively, in this definition. In today’s low-interest rate environment, it’s difficult to find investments that will generate decent income streams that will meet one’s short-term financial needs, let alone for the duration of retirement.


Retirement Income Center Website Makes Its Debut

The long-awaited release of Retirement Income Center’s website is finally here. In the works since the beginning of the year when Retirement Income Center (RIC) succeeded Financial Design Center (FDC), RIC’s website,, made its official debut on September 1st.

Robert Klein, President of Retirement Income Center, and the creator and author of Retirement Income Visions™, a weekly blog featuring innovative strategies for creating and optimizing retirement income that recently celebrated its three-year anniversary, designed and wrote all of the material for the website. RIC’s site is hosted by TypePad® which also hosts Retirement Income Visions™ blog.

Bob said, “I’m extremely excited about the launch of Retirement Income Center’s website. It provides me with yet another tool to demonstrate my passion for retirement income planning. More importantly, it enables me to offer a much-needed educational resource for clients and non-clients alike to help them learn about and appreciate the complex world of retirement income planning. When linked with Retirement Income Visions™, I would dare to say that this combination is one of the internet’s leading providers of independent authoritative information on this subject.”

RIC’s website promotes Retirement Income Center’s motto: Planning, Managing, and Protecting Your Retirement Income™. Per “Looking for a Retirement Income Planner?” on the home page of RIC’s site, “Planning, managing, and protecting retirement income is no small task. Very few firms offer all three services. Investment advisory firms’ services are generally asset-based. They rarely offer or recommend sustained income management solutions that are an integral part of any retirement income plan.”

The website is easy to navigate, with the firm’s motto dictating the site’s three main menu choices: PLANNING, MANAGING, and PROTECTING. Unlike many websites that are often static, RIC’s site, similar to retirement income planning, is dynamic. This is evidenced by the home page which features Retirement Income Visions™ current blog post in the left-hand column and a customized Twitter feed of “Retirement Income Planning News” and links to “Recent Retirement Income Visions™ Posts” in the right-hand column.

RIC’s website provides a portal to the firm’s Retirement Income System. The system is Retirement Income Center’s retirement income planning, management, and protection system for its clients. It serves as a highly secure, up-to-date window into clients’ entire financial world that’s accessible at anytime from anywhere with an internet connection or mobile device.

As stated in the title of the first page in the PLANNING section, “Retirement Income Planning Isn’t Optional.” Per this page, “The consequences of not having a dynamic retirement income plan that’s managed and protected from unforeseen events can be costly at the least and potentially financially and emotionally devastating. This applies to the individuals who fail to plan as well as to their family, and, potentially to their living and unborn heirs.”

Robert Klein, CPA, PFS, CFP®, CLTC is the founder of Retirement Income Center, a Registered Investment Advisor. The firm is located at 5020 Campus Drive in Newport Beach, California.

Annuities Fixed Index Annuities Retirement Income Planning

Retirement Income Planner Key to Success When Investing in Fixed Index Annuities

Last week’s post presented a list of 12 questions you should ask yourself when considering the purchase of fixed index annuities (“FIA’s”). As evidenced by the questions, themselves, as well as the number of questions, this is a very technical area that requires specialized expertise.

So where do you find answers to the various questions? Assuming that investment in one or more FIA’s makes sense in your financial situation, where should you go to purchase these long-term investments? The remainder of this post will assume that you’re considering FIA’s in the context of a retirement income plan.

Unlike investing in the stock market, where you can utilize the services of an investment manager or be a do-it-yourselfer, you must purchase fixed index annuities from a licensed life insurance agent who has the requisite training to sell annuities. Life insurance agents can sell different types of insurance products, including life, disability, and long-term care insurance, as well as annuities. Life insurance companies, life insurance agents, types of products, and the specific products that can be sold, are regulated by an insurance body in each state.

Not every life insurance agent sells annuities. Some only sell variable annuities. Furthermore, there are several different types of fixed annuities, including single premium deferred annuities (“SPDA’s”), single premium immediate annuities (“SPIA’s), deferred income annuities (“DIA’s), and FIA’s. FIA’s are a unique type of fixed annuity that requires specialized expertise and training, and, as such, aren’t offered by every life insurance agent who sells fixed annuities.

Since a FIA is a unique long-term investment with several moving parts in the base product as well as the income rider that change on a regular basis in response to market conditions, it’s important to work with an independent life insurance agent who has access to at least two dozen FIA’s offered by at least six different highly-rated life insurance companies, and sells them on a regular basis.

Going beyond locating a life insurance agent who (a) sells annuities, (b) sells fixed annuities, (c) sells FIA’s, and (d) is an independent agent with access to several different FIA’s offered by several different highly-rated life insurance companies, there are other considerations to keep in mind before purchasing a FIA. First and foremost, you need to recognize and understand the fact that retirement income planning is a specialized discipline, it’s complicated, there are many risks that need to be considered, and mistakes can be costly.

Given the fact that the purchase of a FIA with an income rider for retirement income planning purposes is typically a lifetime investment that often requires a large upfront financial commitment and potentially ongoing periodic investments, it’s especially important that you work with the right individual. Specifically, the person you choose should be a professional retirement income planner. What exactly is a retirement income planner? Sounds like the subject of another post.

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Retirement Income Visions Celebrates 3-Year Anniversary!

Thanks to my clients, subscribers, and other readers, Retirement Income Visions™ is celebrating its three-year anniversary. Retirement Income Visions™ has published a weekly post each Monday morning, the theme of which is Innovative Strategies for Creating and Optimizing Retirement Income™.

As stated in the initial post on August 16, 2009, Retirement Income Visions™ Makes Its Debut, the importance of retirement income planning as a separate and distinct discipline from traditional retirement planning was magnified during the October, 2007 – March, 2009 stock market decline. Just ask anyone who retired just prior to, or during, this period that didn’t have a retirement income plan in place when he/she retired.

With increasing life expectancies, record-low interest rates, traditional pension plans going by the wayside, soaring health and long-term care costs, and the potential for inflation, retirement income planning is no longer an option. It has become a necessity for anyone who wants to ensure that he/she will have sufficient income to meet his/her expenses for the duration of retirement. Recognizing this fact, The American College launched its Retirement Income Certified Professional™ (RICP™) program earlier this year in which I was one of the first enrollees.

Since its inception, Retirement Income Visions™ has used a themed approach, with several weeks of posts focusing on a relevant retirement income planning strategy. This year was no exception. The weekly posts, together with the customized Glossary of Terms, which currently includes definitions of 137 terms to assist in the understanding of technical subject matter, has contributed to a growing body of knowledge in the relatively new retirement income planning profession.

While the first two years of Retirement Income Visions™ presented a variety of retirement income planning strategies, fixed index annuities, or “FIA’s,” have been the sole focus of virtually every weekly post for the past 13 months. Continuing a theme that began on July 11, 2011 during the second year of publication with Shelter a Portion of Your Portfolio From the Next Stock Market Freefall, the inner workings of FIA’s, including their unique benefits as a retirement income planning solution, has been discussed in detail. As a result, Retirement Income Visions™ has become an authoritative source of information on this important and timely topic.

Although FIA’s has been the theme of almost every post for over a year, the posts have been organized by a number of sub-themes. Following the July 11, 2011 post, the introduction to the FIA strategy continued with the next five posts, Looking for Upside Potential With Downside Protection – Take a Look at Indexed Annuities (July 18, 2011), Limit Your Losses to Zero (July 25, 2011), Do You Want to Limit Your Potential Gains? (August 1, 2011), When is the Best Time to Invest in Indexed Annuities? (August 8, 2011), and How Does Your Fixed Index Annuity Grow? (August 22, 2011).

The next twelve posts, beginning with the August 29, 2011 post, Indexing Strategies – The Key to Fixed Index Annuity Growth, through the November 14, 2011 post, How to Get Interest Credited to Your Fixed Index Annuity When the Market Declines, presented a thorough discussion of the various traditional fixed index annuity indexing strategies. This included an introduction to, and comparison of, the following indexing methods: annual point-to-point, monthly point-to-point, monthly average, trigger indexing, inverse performance trigger indexing, as well as the fixed account that’s included as one of the strategy choices by virtually every FIA.

Moving beyond the base product, the subject of the next nine posts was an introduction to the income rider that’s offered by many FIA’s. The income, or guaranteed minimum withdrawal benefit (“GMWB”), rider is the mechanism for providing guaranteed (subject to the claims-paying ability of individual life insurance companies) lifetime income with a flexible start date that is essential to so many retirement income plans. This kicked off with the enlightening December 5, 2011 and December 12, 2011 posts, No Pension? Create Your Own and Add an Income Rider to Your Fixed Index Annuity to Create a Retirement Paycheck. The introduction to income rider series also included two two-part series, Your Fixed Index Annuity Income Rider – What You Don’t Receive (December 19, 2011 and December 26, 2011) and 5 Things You Receive From a Fixed Index Annuity Income Rider (January 9, 2012 and January 16, 2012).

Following two posts introducing fixed index annuity income calculation variables on January 23, 2012 and January 30, 2012 (10 Fixed Index Annuity Income Calculation Variables and Contractual vs. Situation Fixed Index Annuity Income Calculation Variables), a five-part series ensued revolving around a topic often misunderstood by the general public — premium bonuses. The posts in this series included 8 Questions to Ask Yourself When Analyzing Premium Bonuses (February 6, 2012), What’s a Reasonable Premium Bonus Percentage? (February 13, 2012), How Will a Premium Bonus Affect a Fixed Index Annuity’s Value? (February 20, 2012), How Will Withdrawals Affect Your Premium Bonus? (February 27, 2012), and How Will a Premium Bonus Affect Your Fixed Index Annuity Income Distribution? (March 5, 2012).

The next five posts delved into the inner workings behind the variables and interaction of variables behind the calculation of income withdrawal amounts from FIA income riders. This included the following posts: Income Account Value vs. Accumulation Value – What’s the Difference? (March 19, 2012), How is Your Fixed Index Annuity’s Income Account Value Calculated? (April 2, 2012), How Much Income Will You Receive From Your Fixed Index Annuity? (April 9, 2012), and a two-part series, Don’t Be Fooled by Interest Rates – It’s a Package Deal (April 16, 2012 and April 23, 2012).

When Should You Begin Your Lifetime Retirement Payout? was the subject of a two-part series (May 7, 2012 and May 14, 2012) followed by another timing question, When Should You Begin Investing in Income Rider Fixed Index Annuities? (May 21, 2012).

The May 28, 2012 through June 18, 2012 four-part series, Fixed Index Annuity Income Rider Similarities to Social Security, was a well-received and timely topic. This was followed by a second five-part comparison series beginning on June 25, 2012 and continuing through July 23, 2012, FIA’s With Income Riders vs. DIA’s: Which is Right for You?

The last two weeks’ posts have addressed the topic of valuation of a FIA’s income rider stream. This included the July 30, 2012 post, What is the Real Value of Your Fixed Index Annuity, and the August 6, 2012 post, Why Isn’t the Value of Your Income Stream Shown on Your Fixed Index Annuity Statement?.

As I did in my August 9, 2010 and August 15, 2011 “anniversary” posts, I would like to conclude this post by thanking all of my readers for taking the time to read Retirement Income Visions™. Once again, a special thanks to my clients and non-clients, alike, who continue to give me tremendous and much-appreciated feedback and inspiration. Last, but not least, thank you to Nira, my incredible wife, for her enduring support of my blog writing and other professional activities.