CDs purchased for income planning Vs. Income planning with Single Premium Immediate Annuities.

General Advantages

As previously stated, income planning will bring peace of mind, safety, and security, making certain that retirees will not outlive their savings.The consumer will now have an opportunity to generate dependable monthly income.

Planners know all too well, that clients who overspend early in retirement run the risk of prematurely depleting their retirement savings. Clients may overlook excessive spending in the early phases of their retirement, assuming they will make it up later with market gains. Obviously, this can be extremely risky. Market sensitive products may help us build our retirement savings in good times, but they cannot guarantee preservation and protection of those savings in uncertain times. Income planning is about removing the uncertainty, and providing peace of mind and security. Income planning will become increasingly important to retirees.

Income planning will give consumers more control over their retirement savings. When financial advisors bring income planning into the discussion, and if they were to show an example, illustrating $3,000 a month of safe, steady, dependable retirement income, consumers express genuine interest. Often, clients and advisors spend time discussing liquidation of a portfolio on an ongoing basis, selling stocks, and mutual funds, cashing in bonds or CDs, in order to satisfy retirement income needs. If the stock market experiences a sudden decline, retirement savings can be lost forever.

Income planning involves the allocation of savings into various phases.Phase-1 usually involves the purchase of a single premium immediate annuity, while phases 2, 3 and 4 will include the use of multi-year rate guarantee annuities. Instead of purchasing bonds, clients purchase multi-year rate guarantee annuities that guarantee a rate of interest: 4%, 4.25%, 4.5% or 4.75% for 5 or 10years. When you purchase multi-year rate guarantee annuities, you remove the default and or credit risk associated with the purchase of bonds. When you use multi-year rate guarantee annuities, the insurance company stands between the consumer and default and or credit risk. There is also the underlying safety of the State Guaranty Corporation.

Besides the multi-year rate guarantee annuities (CD like annuities), most advisors recommend fixed-indexed annuities, thinking that over time, 10 or 15 years, the fixed-indexed annuity could provide a moderate return, yet provide the consumer with zero market risk.

Income planning is a popular topic of conversation these days. Utilizing muti-year guarantee annuities (CD like annuities), and single premium immediate annuities offer a smart alternative to today’s retirees. The best way to communicate the effectiveness of income planning is with an example. You will see that we break down retirement years in 4 phases, and we make some assumptions regarding interest rates as follows.

Consider the following:

  • The time period to be considered is 20 years in retirement.
  • We will assume that 1-year CDs are utilized since consumers purchase 1 year CDs the majority of the time, and that they are rolled over year after year.
  • We assume that those CDs will have an interest rate of 4.5%.

* Please keep in mind that fluctuations in future interest rates may affect both CDs and annuities used in our assumptions, providing neither product with an advantage.

Income Plan assumptions;

Phase 1 (years 1-5)
A) A 5-year-Income Annuity is utilized in year 1, providing income of $2,988.97 monthly.
Phase 2 (years 6-10)
A) A 5-year Income Annuity is utilized in year 6, providing income of $2,988.97 in years 6 through 10.
B) A muti-year guarantee annuity paying 4.25% accumulates for 5 years.
Phase 3 (years 11-15)
A) A 5-year Income Annuity is utilized in year 11, providing income of $2,988.97 in years 11 through 15.
B) A muti-year guarantee annuity paying 4.50% accumulates for 10 years.
Phase 4 (years 16-20)
A) A 5-year Income Annuity is utilized in year 16, providing income of $2,988.97 in years 16 through 20.
B) A muti-year guarantee annuity paying 5.5%, accumulates for 15 years.

$500,000 Example CD @ 4.5%,

  • Year -1; start with the assumption you have $500,000.
  • Take out an initial $35,867.61 leaving 464,132.39 to grow at a hypothetical 4.5%. You now have $485,018.35 (20,885.96 growth, less tax @ 28%=$5,848.07 paid from balance, leaves $15,037.89 after tax growth), and a new after-tax balance of $479,170.28.
  • Year -2; Take out $35,867.61 again and repeat the above process.
  • Take this as far as you can, applying 1-year CDs, 4.5% as a CD rate, to your balance, take the withdrawal of 35,867.61 as income every year, and you run out of funds at the end of year 18.
  • The income planning concept allows you to administer income via the SPIA, (a single premium immediate annuity), and the tax efficiency makes it all work .
  • You get safety and peace of mind; …you have a plan which will take you, in this example, through the next 20 years.
  • You are in control; you now have more control of your savings.
  • Your heirs avoid any probate issue or delays. Your children, your heirs do not have to worry about mom or dad, as you now have the security of a steady monthly income.
  • There is an added benefit with regard to additional liquidity, as phases 2, 3 and 4, allow for excess liquidity via a 10% free withdrawal feature, normally available from the deferred annuities utilized in the accumulation phase.
  • If interest rates increase, monthly income would be enhanced when SPIAs are purchased, at end of years 5, 10, and 15.
  • Annuities usually include nursing home or terminal illness waivers, providing consumers access to their full account value if needed.

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