When thinking of guaranteed income during retirement, there are really only three places you can select from: (1) Social Security, (2) pensions, and (3) annuities. While the first two are very well known (and depended on!), annuities also have the ability to provide you the benefit of predictable income and give you peace of mind. In this episode of Money Script Monday, Jordan goes over a sample Your Retirement Income Report that compares the account values of a S&P 500 portfolio against a fixed index annuity (FIA) and shows you how they may perform throughout your retirement.
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Hi, Jordan Arias here. Welcome to today's Money Script Monday.
In the last episode, Kevin talked about the guarantees when it comes to income retirement, and he really focused on Social Security, pension, and annuities.
Continuing that conversation, what we're going to focus on today is annuities.
We know that, besides the pensions and besides Social Security, that's the only avenue that we're able to receive guaranteed income during our retirement.
And so, what we want to do is look at the annuities and look at these four risks and see can these annuities overcome these four risks?
Can they overcome longevity risk, market risk, inflation risk, sequence-of-returns risks?
Instead of me just up here talking about it, what I want to do is dive a little bit deeper into our annuity report that really goes over these four risks and shows how annuities can work so well in regards to guaranteed income.
So, with that, let's get started.
Retirees should plan for a long retirement
First, what I want to do is look at longevity risk.
Now, we mentioned this in the prior video, but as you can see here if you take a couple that's 65 years old, they have a 50% chance that at least one spouse will live until age 91.
When we look at that, we need to be able to know that all of our guaranteed payments in regards to our fixed expenses are taken care of for the life of our retirement.
As you can see here, not only will it show male in our report, female, but then it also includes spouse as well.
At age 91, we have a 50% chance that one spouse will live to age 91.
We have a 75% chance that one spouse will live to at least age 86.
So, what are we doing in order to protect ourselves from that longevity risk? And we're going to tie it back to longevity risk here in a second with regards to some numbers that I want to show you on a comparison tool.
S&P 500 and indexed annuity hypothetical historical returns
We're going to look at market risk, and we're going to look at market risk as well as sequence-of-returns.
Here you can see our green column is our annuities. And with our annuities, we're indicating that there's a floor and that there's a cap.
Now, what I mean by floor is if the market goes down, we are not going to receive any type of negative return inside our annuity contract.
So, we're going into an annuity contract to provide us the guarantees that we're looking for to know that our income will be paid out.
The blue column is looking at if you were in the S&P all the way to 2000.
If you look at the S&P, what this is showing is in this example, if we were approaching retirement and our accounts have built up, our numbers are good, we're looking now to take distributions for retirement.
And a lot of individuals experienced this in 2008, and then there is a drop in the market.
If you take negative returns, as well as distributions for income, your retirement account will run out most of the time 50% more than it would if we had regular returns.
What we're trying to show here is that we need to be able to not be concerned about negative market risks, negative returns in the market if we can provide guaranteed income.
This chart shows is if there is a drop in the market, it's not okay, but essentially it is okay with regards to our income stream because, again, we're going to be moving horizontal as you can see in this green column. And what we're doing is we're not having to recover from the losses.
As you can see, the columns start to match up once there's positive returns. And if we look all the way through to 2017, the blue line, which is the S&P, ends up beating the annuity product that has that ceiling of how much we can earn in order to protect us from our floor.
But again, what we're doing with the annuity is we're providing those guaranteed income streams.
We're not necessarily worried about hitting home runs in terms of interest rate returns, we're more worried about mitigating our loses.
When you have a great diversified portfolio with some annuities and then some money exposed in the market, it helps to protect yourself. And for the sake of this conversation, we're looking at income streams, income streams in retirement.
Keep that in mind because I am going to tie back to it with regards to the S&P value being more than our annuity value, even with all the ups and downs from 1999 all the way up to 2017.
So, how do we protect ourselves from all of this market exposure? How do we protect ourselves from getting guaranteed distributions?
Well, that's where the indexed deferred annuities come into play. And your advisor is going to be able to go more in-depth with you. I'm keeping it very, very surface level from a 30,000-foot view to give you those questions to start coming up with in your own mind of how this is going to fit inside my portfolio.
But as you can see here, this is kind of now the drop down that's going to match up with the graph that we just described.
Sequence-of-returns are so important because if we flip this over where we started off with returns versus negative returns, positive returns versus negatives, it's going to have a drastic effect on what our account value looks like.
We need to be able to protect ourselves from that.
Annuity versus portfolio analysis
Total Accumulation by Age
What I want to do first is show you our accumulation graph by age.
So, what we did is we took the previous graph and said, "Okay. We're going to take what the S&P did for the last 10 years," that's our blue line, we're going to take a steady 6% return, that means every single year, you're earning 6%, and then we're going to take the proposed annuity that's going to have, again, that floor where you can never lose money, but it's going to have a ceiling on how much you can earn because they want to give you that protection.
From our graph here, you can see that blue, the S&P, outperforms the other income streams with regards to the total end value.
But when we look at guaranteed income streams, we're not entirely concerned about the end value. We're more concerned, and this is the question that you have to ask your advisor, is it's not just about what that end number is that I reached my retirement account up to 2 million, to 3 million, whatever that number is, but how am I going to in the most efficient manner, take distributions from those accounts? What's the most effective way?
And oftentimes, you can take a better distribution from a less valued account and have that money grow out longer. And that's what we want to show you here with this report as well.
Annuity versus portfolio yearly breakdown
Let's more look at the comparison. And this kind of will tie everything back in with regards to longevity, with regards to market risk, in regards to distribution that we look at.
In the green is our annuity column. And for the sake of this comparison, this is just a sample, we did $300,000 and we looked at, "Okay. If we put $300,000 in all of these accounts," so in an annuity or into an account that was earning a steady 6% rate of return or into an account where you're just following the S&P itself or into an account that had an unfavorable 6% return.
That's a key point as you can have multiple account values with the same average rate of return.
So, don't necessarily be fooled when an advisor is saying, "Well, my portfolio averaged 6%, 7%, 8%." Yes, that's great, but at the same time, as you can see in this comparison when you look at it more thoroughly, an unfavorable 6% rate of return can have a much different number than a steady 6% rate of return or an average rate of return that started off where we received positive returns instead of negatives.
In this example, it's still an average 6% rate of return but you can see the ending value is $239,000 versus the steady return had an ending value of $402,000.
If we look further in-depth in regards to the S&P, we can see that the S&P value has an ending value of $369,000 before we start taking distributions.
Our annuity is very, very close because, in that last graph, you can see that it was very, very close but we then had an accumulation value before we started taking income of $377,000.
What we want to look at are the income streams.
It's not necessarily about how quickly and how high up the mountain we can get, but it's about how safely we can get down the mountain. And what levers do we have in place to provide us guarantees to be able to get down the mountain safely?
If we tried to take the same distribution from all of these accounts, and these accounts are based off of the annuity income stream, if I scroll down, what you'll start to see is all of these accounts will start to deplete.
So, in our unfavorable method, we run out of money at age 77.
In our S&P, if we just followed the market and then take distributions from the market, we run out of money at age 81.
If we look at even a steady 6% rate of return, but still trying to take the same guaranteed distributions that we can get inside of our annuity, we run out at age 85.
And if you remember from the first visual that I showed you, we have a 75% chance that a married couple that, one, will at least live to age 86 and we have a 50% chance that one will live to age 91.
So, do we want to be in an account that has risk exposure and then, simultaneously, doesn't have a guaranteed distribution method of taking income stream.
That's really the big key as to guaranteed income in retirement.
And that's why annuities work so well.
We mentioned in the previous Money Script Monday why Social Security and pensions are so valuable to provide those guaranteed income streams.
The one thing that we didn't talk about just yet is inflation risk.
When we look at inflation, we can see here that our income stream continues to increase. And so we're looking at annuities that have built-in guaranteed inflation, meaning that now it's kind of what's called a lock and reset.
If I earn interest, my income will go up by that interest amount, and now that's my new minimum. I will never go below that amount.
It locks and resets every single year as I earn interest in my account.
If we can provide for inflation protection, if we can provide for longevity risk, if we can provide not having to worry about market risk and sequence-of-returns, that's more important than anything with regards to double-digit returns, distribution methods so on.
That's what we're looking at and that's why annuities work so well in providing fixed income to cover those expenses.
We can still have money in the exposure. We can still look at working with different accounts, but we want to be diversified and we want to know that, at the end of the day, our fixed income expenses are taken care of.
That wraps up reviewing the annuity report.
Next week, Brian is going to be going through our shortfall analysis. That's an additional section within our annuity report that not only covers the annuities, but then also takes other assets that you have like pensions, like Social Security, and combines them all together.
You now can take a full holistic approach in regards to your income stream.
Request your custom Retirement Income Report
If you are interested in receiving a customized annuity report, use the information on this page to request yours today.
We’ll be able to generate a report that has your numbers in here so that it works to your unique situation. You’ll be able to see how annuities work for you and how they cover these four major risks in moving forward. Thank you for your time today and hope you have a great day.