I remember my first bond. And no, I’m not talking about a spy movie. My first bond was given to me by my grandparents. It paid a healthy rate, 6%, and I held it to maturity and cashed it in, because rates had dropped significantly. And really, that’s where rates have stayed. Near historic lows, bonds do not offer the same appeal as they once did for retirees or safe-money investors. I recently wrote a whitepaper detailing the different options when it comes to “guaranteed income” in retirement. It is below. I have also included an article that is a bit higher level overview of bonds vs. FIA’s.
When we are looking at creating a guaranteed stream of income in retirement, we have a number of different ways to accomplish this, each with pros and cons. Let’s take a look at four different approaches. We will use the same assumptions for each case and will calculate the lump sum of money needed to accomplish the client’s income goals. Let’s assume the client is 65 years old, needs $30,000 a year in income, has $1,000,000 in investable assets, and assume a 30-year retirement. The four sources of income we will look at are a CD, Treasury Bond, a multi-year guarantee annuity, and a fixed indexed annuity. With each of these, we are using rates as of 5/23/18. For the CD, we used the average national rate. For the MYGA, we used the highest rate we could find. For the FIA, we used the highest payout (benefit rate) at age 65 we could find. Let’s see how it stacks up in the graphic below.
| Assumptions: Age 65, needing $30,000 income/year, client has $1,000,000 investable assets | ||||||||||
| Vehicle | Current Rate | Principal Needed | Notes: | |||||||
| CD | 1.06% | $2,830,188.68 | 5 yr National Rate (as of 5/23/18) | |||||||
| Bond | 3.17% | $946,372.24 | 30 yr T-bond (as of 5/23/18) | |||||||
| MYGA | 3.60% | $833,333.33 | 5 yr Bankers Life (as of 5/23/18) | |||||||
| Fixed Indexed Annuity | 5.50% | $545,454.55 | Allianz 360 (as of 5/23/18) | |||||||
As we can see, the fixed indexed annuity is the most efficient at producing a guaranteed income. There are a few drawbacks to the fixed indexed annuity strategy. The first and foremost is that, unlike the other strategies, the withdrawals or lifetime income payments from the fixed indexed annuity will reduce the account balance. In this case study scenario, it would take 18 years to get the principal back in the form of lifetime income payments. We should note that if the client passes away and has an account balance left, they will receive the remaining balance in most cases. Let’s think about this another way. While our account balance will be reduced by the withdrawals in the fixed indexed annuity, we will still have $454,545.45 left in our “growth” bucket. If we assume the “growth” bucket grows at a modest 5% a year on average, at the end of a 30-year retirement, we would have $2,062,753. Let’s compare that to the 30-year bond. We would have the principal remaining plus the $53,627.73 remaining in the “growth” bucket. Again, let’s assume the “growth” bucket grows at 5% average annualized return. That would leave us with $1,189,735. The other two strategies aren’t guaranteed to have the same rate for 30 years, so we may have to take less income, if rates go down, to maintain principal. But either way we do not end up with as much money at the end of our 30-year retirement.
We know that there is a fit for all of the vehicles we reviewed. If you would like access to a proprietary software that will help you identify and illustrate to your clients their income need, and then show them the solution, we would love to help. Call us with your next retirement income case.
For Further Reading:
https://seekingalpha.com/article/4176481-case-fixed-indexed-annuities-bonds