Don’t Let Your Income Die Before You Do

04/19/2012 7:45 am EST

Focus: ANNUITIES

Stan The Annuity Man

Annuity Expert, Stan The Annuity Man

When planning for your retirement, always keep thinking about how long your nest egg will last, writes Stan Haithcock of Stantheannuityman.com.

What is the life expectancy of your income stream? How long will your income stream live? Have you ever looked at your monthly retirement income like this? Well, if you haven’t, you should!

In a world of global market, political, and economic volatility with no end in sight, one of the primary concerns of retirees and pre-retirees is the fear of outliving their money. The questions you need to ask yourself are: “How much risk am I shouldering with my current portfolio?” and “How much risk have I transferred?”

Social Security payments are a transfer of risk that the government will pay you for the rest of your life. If you are fortunate enough to have worked for a company that provided a pension upon retirement, then that is a transfer of risk payment as well. With your additional income or future income, have you transferred that risk?

During the era of what I call “Jimmy Carter CDs” paying 13% to 18% yield, it was very easy to create that needed income stream without risk. If those CDs ever show up again, I will be in line right behind you!

However, the low-interest-rate reality is that it looks like rates might be stagnant for a while. No one knows, but we all need to prepare for the possibility of Japan-like rates for the foreseeable future.

So what are your options for true “transfer of risk” lifetime income? The list of choices is growing shorter every day.

If you know how to manage money or put together an income portfolio, then a proper mix of bonds, dividend-paying stocks, REITs, and selected MLPs can help create an ongoing income stream. Everyone is aware that either you or your advisor (or both) should actively oversee this type of balanced strategy, because that type of portfolio requires you to shoulder the risk.

If this type of strategy describes your current holdings, then you should consider adding a “transfer of risk” strategy using specific fixed annuities.

Annuity “transfer of risk” strategies can provide income for life, with payments starting immediately or at a specific date in the future. Hybrid annuities can also provide income payment to cover for long-term care as well. As I mentioned in a previous article, annuities should be used not only for every day expenses, but health-care expenses as well.

For any of these “transfer of risk” strategies, I recommend using fixed annuities because of the principal protection and the cost effectiveness when compared to variable annuities. Below I have listed a few (not all) annuity products that can provide an income stream that you can never outlive.

Single Premium Immediate Annuities
This is the original annuity design. It is sometimes called an Income Annuity or a Pension Annuity.

A SPIA is a true “transfer of risk” income product that provides a lifetime income stream or an income stream for a specific period of time…your choice. Your first payment will start 31 days after the contract is issued.

My advice is to structure a SPIA contract either “Life with Cash Refund” or “Life with Installment Refund.” These two structures ensure that 100% of the money will go to the owner and/or listed beneficiaries.

Income payments are based upon your life expectancy, and the insurance company is on the hook to pay for as long as you live. SPIAs are a combination of return of principal and interest, so in a non-IRA account, the vast majority of your income stream will not be taxable.

You can set SPIAs up to pay single life or joint life, and they can be used in both IRA & non-IRA accounts. You can also add a contractual COLA (Cost of Living Adjustment) Rider to a SPIA in order to have your income stream increase annually by a chosen percentage to combat inflation on an ongoing basis. Any deferred annuity contract can be “annuitized” and turned into a Single Premium Immediate Annuity.

Fixed Indexed Annuities with Income Rider
Equity Indexed Annuities (also called Fixed Index Annuities) are a fixed annuity structure with an attached income rider that can be used for “target date” income planning.

An income rider is an attached benefit that can be added to a deferred annuity contract. The key point to remember about any annuity income rider is that it is not a walk away amount. You can never get the money out in a lump sum format. Income Riders can only be used for lifetime income.

Riders are typically mis-sold by agents and advisors as yield, because income riders contractually grow by 6% or more during the deferral years. Once you turn on your lifetime income stream, the income rider growth amount stops, but your income stream continues until you die.

Longevity Annuity
A Longevity Annuity is designed to provide protection against outliving your money later in life. It is also sometimes called an Advanced Life Delayed Annuity.

The structure of this annuity requires you to wait until a later date before you start receiving a lifetime payout. The later you choose to begin your payments, the larger your payments will be.

Longevity Annuities are like buying a homeowner’s policy with a large deductible. They allow you to insure that you will not run out of money later in life, while keeping your premium outlay to a minimum. The downside to this product is that if you die before you begin to receive payments, your heirs will receive nothing. This should be 5% to 10% (maximum) of your portfolio.

When you review your current income strategies, always remember to ensure that your income stream will always outlive you!

A news reporter recently called me the National “Annuity Consumer Advocate” in the same vein as Ralph Nader and Clark Howard are for other products and services. I hope to continually educate the public on the complex and sometimes ugly world of annuities.

I just published The Annuity Stanifesto, fully explaining in an easy-to-read format how these misunderstood and misrepresented products actually can work within your portfolio. You can get a free copy of The Annuity Stanifesto by going to my Web site and downloading your copy.