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The Sweet Spot in Retirement Income Planning

Posted by Larry Jones on Jul 6, 2021 9:30:00 AM
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Golf, the Sport of Kings

Almost every time I play a round of golf I vow that it will never happen again. I don't believe I have ever hated anything as much as I hate this aggravating and extremely difficult sport. If only I could quit. But something about it keeps bringing me back to try again. That something, is the sweet spot!

Now, I've learned when speaking to other golfers that I am the only one who has these difficulties. It seems that every single person I ask, "how was your round?" will reply that it was an awful day. "I got stuck in a bunker on number three and barely broke 75." It's that kind of crazy talk that really gets to me, and I'm sure it would make even Jordan Spieth nervous to hear it. A typical round for me includes many different activities. Bird watching in the woods is always pleasant. I'm reminded of boyhood trips to the beach as I play in the sand, and I know my putting brings back memories of windmills and dinosaurs. I'm usually just about to throw my clubs when it happens. I take a correct stance, an enviable swing, and, ping! I hit that sweet spot and observe a 250 yard drive straight as an arrow. All thoughts of golf enmity disappear instantly and from now on no greens fee is too high. I'm ready for Pebble Beach! That sweet spot is a beautiful thing, and is responsible for the millions of dollars spent each year by amateur duffers. You can't argue with the sweet spot.

If you're a golfer you know exactly what I'm talking about. But did you know that when it comes to retirement income, there's a sweet spot there as well.


After retirement, income trumps portfolio growth

Most of us have probably spent a great deal of our lives preparing for retirement, that great day of endless golf, world cruises, and RV trips to everywhere, all with our grandchildren, of course. We have schooled ourselves in balanced portfoios, asset allocation, and return on investment. Many have utilized such great tax-advantaged accumulation vehicles as the 401(k) and 403(b)'s. We're savvy! 

Until the day we retire. Then we discover that it's no longer all about the growth in our portfolio, or the tax savings. No, for most of us, our focus will shift to three questions: (1) where will my income come from now, (2) will it be enough to support my current lifestyle, and (3) will it last as long as I'm alive?

I'm writing this today to share with you what I believe is one of the best money vehicles on the planet to give you the power to answer "yes" to those three questions, and to show you when the optimum time is to begin changing your focus from accumulation to retirement income, the "sweet spot," if you will.

If I told you that there was a financial product out there that would guarantee by contract, that you could accumulate a minimum of 8% over the next 10-12 years, and then give you a lifetime income payout of 5-7% off of that total, for as long as you and your spouse live, without subjecting your principal to stock market risk, would you be interested in hearing about it?

Well, there is such a product. It's the indexed annuity with an income rider attached. Now, I know that you have heard from your stockbroker that "annuities are bad" and usually he says that just before he puts you in his favorite variable annuity. Annuities can be good or bad depending on what your financial golas are. An indexed annuity, with the income rider, can be the perfect vehicle to accomplish that retirement income increase you are looking for.

Let's take an example:

Bob has a 401(k) that he's looking to move into a personal IRA. It's worth $500,000 today. He's 55 years old, hopes to work until he's 65, and then would like to have at least $70,000 a year in after-tax income. 

According to his Social Security statement, Bob can expect $2,000 a month from the government, another $1500 from a pension, for a total of $42,000 a year. That leaves a shortfal of $28,000. Where will that money come from?

Bob's stockbroker tells him not to worry. By investing the $500K in a balanced portfolio he should be able to earn a 7% ROI and by age 65 he'll have almost a million dollars, where he can then draw down 4% a year to give him an additional $39,000 a year. Sounds good, right?

Let's look at another scenario. Suppose Bob took $300,000 of that 401(k) and moved it into an indexed annuity with income rider. That $300K over the next ten years would grow into a retirement income pile of $648,000, which is less than his stockbroker got for him, but then the annuity has a payout rate of 6.5%, not 4%, and will continue as long as he and his wife lives, and with no market risk! That's $42,000 a year from the annuity, or $70,000 income, and guaranteed for life. To get those same results his broker would have had to accumulate over a million dollars for Bob, and would have taken an 8% return for 10 straight years.....oh, and yeah, there's one other thing. With the annuity Bob still had another $200,000 left over to invest! That gives him a possible bonus of another $3-400,000 in his investment account to go along with his guaranteed income for life. That means Bob's broker would have had to return almost 11% for every one of those ten years to accomplish the same thing. Even then, with all of Bob's assets in the market he could expect a correction every 5-7 years on average, putting his entire calculation at risk.

The Sweet Spot

There is, I have found, usually only one drawback to the strategy above. You need at least ten years to take maximum advantage of the income rider. That's the "sweet spot." For Bob it would mean getting into the annuity around age 55. Why is that a problem? Because most employers, due to ERISA rules, will not allow you to move any of your 401(k) money until after you leave the firm, even though you may be 100% vested. If you don't leave the firm until the day you retire then you have lost the power of the income rider. That, in my opinion is a huge disservice to an employee. But to be fair, it's likely that your employer doesn't even know about this strategy, and the stockbroker who oversees the account hasn't told them. Why would he?

The indexed annuity with an income rider offers the stability of no stock market exposure, along with the certainty of a lifetime income. What's not to like? 

Until next time,


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Insurance and annuity products are not sold through Virtue Capital Management, LLC (“VCM”). VCM does not endorse any annuity or insurance products nor does it guarantee any annuity or insurance products performance. Any guarantees mentioned are backed by the financial strength and claims paying ability of the issuing insurance company and may be subject to caps, restrictions, fees and surrender charges as described in the annuity contract.

Topics: Retirement Income

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