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, Brian concludes the 2-part series about Your Retirement Income Report and demonstrates how a fixed index annuity (FIA) may help reduce - or completely eliminate - the shortfall of income so many people experience once they are in retirement.

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Video transcription

Hi. Welcome to another episode of "Money Script Monday." My name is Brian Manderscheid. Today we're going to go into Your Retirement Income Report.

Last week, Jordan Arias started us off in this conversation and talked about annuities, what are the benefits, as well as how do they compare to other financial alternatives that you may be considering.

Today, we're going to get back into Your Retirement Income Report, and go into this shortfall analysis component.

The shortfall analysis is a holistic view of your retirement picture, both if you do nothing, as well as if you move a portion of your money into an annuity that will provide a guaranteed lifetime income stream that you can never outlive.

By doing so, you can help reduce, or maybe even eliminate the four major risks of your retirement income.

With that said, let's jump to the screen, and let's get started.

Projected retirement income analysis

Let's get into the projected retirement income analysis of Your Retirement Income Report.

Now, the couple we're going to talk about today, they're currently age 59, turning 60, here shortly.

They want to work another, roughly 6 years until age 66, their full retirement age.

They're currently making about $120,000, and they want roughly 80% of that, or $100,000 to live off of during retirement.

We're going to assume a 2.5% inflation rate throughout the analysis.

Note, of the $100,000 desired income, $80,000 is considered essential spending. Those are things like housing, groceries, healthcare costs, they're basic income requirements.

These are the things that they need to cover to have a successful retirement.

The other $20,000 is discretionary spending. Things like travel, entertainment, doing things for the grandkids. This is their lifestyle income requirement, things they want to do and accomplish when they retire.

So, again, they want $100,000, but they really, really need $80,000 to make their retirement work. If they get to the $100,000, that will be considered a successful retirement.

They currently have a million dollars saved up for retirement.

As far as Social Security benefits at full retirement age, combined between husband and wife, they have $4,500 a month that they are counting on.

For simplicity, we're going to assume that they do take Social Security at full retirement age. We can show them taking at various ages such as delaying all the way to age 70 to maximize their benefits.

Like most of us, they do not have any pension income from either state or corporate pensions.

In our proposed analysis, we're going to show of their $1 million of assets, we're going to move $300,000 into an annuity that's going to provide guaranteed joint life income when they reach the age of 66.

How do we come up with $300,000?

For number one, we don't want to put all our eggs in one basket. And we want to make sure that this couple is going to still be diversified during retirement.

The second reason we chose $100,000 is between the guaranteed income from the annuity, and the guaranteed income from Social Security, that provided us with roughly 80% of their retirement income coming from fixed sources.

Essentially, we use the annuity to bridge the gap between Social Security and their essential spending, what they need for their basic income requirement.

We look here at the key takeaways, current scenario, and the proposed scenario that includes the $300,000 annuity. The fixed income score.

Current Scenario

In their current scenario, we'll see that only 54% of their income during retirement is coming from fixed sources.

Again, for this couple, they only had income coming from Social Security for fixed income.

Including an Annuity

With our proposed plan, we had an 80% score.

So, basically, 80% of their income was coming from fixed sources being the guaranteed income from Social Security and the proposed annuity.

The total income generated to age 95, 4.5 million in their current scenario, almost 5.1 million with the proposed scenario.

We picked up over a half million dollars of additional income by going with our scenario that included the $300,000 annuity.

The conclusion of this report is that if they keep doing what they're doing, they're going to run out of the money by age 90.

There's about a coin flip chance that one of them will live to at least that age, if not longer due to their good health, as well as the advancements of medical technology.

The conclusion in our proposed plan is that that same age 95, they actually have about $670,000 remaining at that point in time.

So, of their million dollars today, they still have about 67% of that at age 95.

Current Scenario Total Income vs. Including Annuity Total Income

You can see visually, if you like, you know, to look at things rather than numerical but more visually, on the current scenario there are three colors. This is the income that are coming from assets.

The blue is fixed income, for their case being Social Security. And the red is a shortfall, that's the money that they want to spend but they're not going to have because they run out of money at age 90.

So, you can see a substantial amount of their income is relying upon their assets to cover their expenses.

Now, if we transition over to the proposed scenario with the annuity, you can see the opposite. Where only a portion, smaller portion of their income is coming from asset income, the $700,000 remaining after we moved $300,000 to annuities, and the far majority of their income is coming from fixed sources being Social Security and the guaranteed income from the annuity.

There's no red because they don't run out of money. They actually have a buffer of about $670,000 leftover.

Projected income – current scenario yearly breakdown

Diving more into this report, let's look at their current scenario.

Desired Income

Again, if they do nothing and just go along their current path. The $100,000 income they need today with a 2.5% inflation rate, they'll actually need to pull out about $116,000 when they retire to buy the same amount of goods that $100,000 will purchase today.

Fast forward all the way to age 90, they'll need almost $210,000 at a 2.5 inflation rate, again, to provide $100,000 of today's goods and services.

Other Fixed Income

Their Social Security combined with inflation, and just for simplicity we're matching at the same, 2.5% rate, Social Security cost living adjustments can vary over the years.

Their Social Security starts off as $62,000, and increases from there.

It's important to note that when one of the spouses pass away, that the surviving spouse will step up to the higher of the two benefits.

Total Fixed Income

The total income which is, again, just Social Security, they don't have any rental income, other income here, or pension income from state or corporations, so the remaining difference of their income need after their fixed income, will have to come from their retirement assets which would be about $53,000.

Now, just for conservatism, we assume that their million dollars today is not going to grow over the next six years which may or may not be realistic.

However, there are so many things that could happen, stock market losses, etc., that we just wanted to be more conservative and say your billion dollars is going to be a million when you retire.

Withdrawals from Other Accounts

Now, you can see we're pulling out about a 5.3% withdrawal rate, inflation adjusted, to meet the desired income need.

Typically, you would never want to take more than a 4% inflationary adjusted withdraw rate from your assets because if you take a too high withdrawal rate, that can cause you to run out of money.

Annual Return

In this report, we have the ability to show randomized rates of return, look backs of various indices like the S&P 500, but for simplicity we're just using a 6% level returns.

We're taking the sequence of returns off the table, market losses off the table, and just saying if you're earning 6% each year.

The reality is if you do suffer market losses, or have especially during the first three to five years both before and after retirement, that would substantially decrease the longevity of the portfolio.

But again, we're just going to keep things simple and look at 6% per year.

And you can see the withdrawal rate continues to grow year by year as our portfolio value decreases and as our income need increases.

At age 90 you can see we ran out of the money, and this column here in red represents our shortfall, the $564,000 of income that we want to have but we don't because we ran out of money.

Projected income – including annuity yearly breakdown

Let's transition from the current scenario to the proposed scenario.

This is the same situation but looking at a $300,000 annuity added into the portfolio.

Desired Income

You can see desired income is exactly the same. We now have this annuity income.

It starts off at about $21,000 and increases from there.

This annuity will actually increase every single year based on the change or growth in the annuity.

For example, if the annuity goes up by 5%, the value of the annuity goes up by 5%, the income would also go up by 5% and be locked in at that higher income amount.

However, if the index does zero, in that case the income stays level.

So again, your income can go up, it can go sideways, but it can never go down.

Other Fixed Income

The other fixed income is coming from Social Security, the same income figures as we looked at before.

We can show them maximizing which would create probably about 132% more income by age 70, but we're not assuming that just for simplicity of today's presentation.

Total Fixed Income

Total fixed income between the annuity income, and Social Security, $83,000.

Withdrawals from Other Accounts

The remaining value between the desired income and our fixed income is only $32,000.

So we need to take about a 4.5% withdrawal rate from the $700,000 we have left over after the purchase of the annuity.

Since our annuity income is rising at a rate higher than inflation in this projection, you can see that our income never really increases, at least not a substantial amount, our income withdrawal need from the other accounts.

Annual Return

If we earn 6%, just the same 6% as we have in the previous scenario, you can see that our other retirement balance actually never gets really depleted.

While we are taking a slightly higher withdrawal rate than four, we're not having to take a higher inflationary adjusted withdraw rate because our annuity income in this case is projecting at a greater rate than inflation.

Annuity Accumulation Value

If we look at the total values between the other retirement and assets and the annuity, you can see we're coasting along here, our annuity starts to run down.

However, our retirement income, our retirement assets stays relatively level.

There's a point here where the annuity value runs to zero. However, at that point we're still continuing to receive income.

The benefit of this annuity is you can run out of money but you can never run out of income.

That's a very important thing that at that point in time, at age 82, when the annuity value runs to zero, the insurance company is still paying out the guaranteed income payments.

Essentially, at that point you're living off the mortality credits of the insurance company, and you're living off the insurance company's general reserves, essentially, that they've hedged for and provided these benefits for you.

Total Retirement Assets

At the end of this analysis, you can see that we're left with $670,000 rather than zero.

We don't have a shortfall.

So now, the kids or grandkids will get whatever is left over.

And this couple had a very happy retirement, all their income needs were covered. The annuity and Social Security covered the essential, and the remaining assets covered the discretionary.

Request your custom Retirement Income Report

That wraps it up for the shortfall analysis component. As you can see, an annuity may make a great addition to your overall retirement picture when done with the right financial professional.

If you're interested in receiving a customized copy of Your Retirement Income Report, please use the information on the screen to request one today.

With that, folks, thank you very much. We'll see you next time.