Should I Buy An Annuity {Case Study} - Cravitz Financial & Insurance Solutions

Should I Buy An Annuity {Case Study}

Should you buy an annuity to help provide the income you need in retirement? In this video I will share an actual case study and we will look at the pros and cons of either buying or not buying an annuity.

Full Transcript:

How's it going everybody, it's Ryan here. Okay, so today we're going to take a look at whether it makes sense to perhaps buy an annuity as a part of your retirement income plan. So I'm going to walk you through a sample case study, and we'll take a look at whether it makes sense to buy an annuity or not, what the pros and the cons are, all that sort of thing.

So understand just a couple of things first off, before I go through and share my screen here with you and we go through the actual case study. And that is that, number one, when it comes to annuities, there are several different types of annuities. Now I'll do another video where I go through the different types, perhaps. But in this video, just know that the type of annuity that we're going to be taking a look at is a fixed index annuity that has a guaranteed lifetime income rider attached to it.

So, I'll explain more about that in just a moment. Another quick thought, just about annuities in general, is that they're an interesting topic because they're extremely polarizing for whatever reason. You have people that absolutely hate annuities, and then you have people that absolutely love annuities. For whatever reason, which I don't want to get into during this video and speculate as to why that might be.

I'll just tell you where I stand. And that is, is that I believe that annuities are neither good, nor bad. They're just appropriate or not appropriate for your particular situation. And so, and that's like what we're going to look at here today. We're going to look at how the retirement plan looks like by using the annuity, versus not. And we're going to weigh the pros and cons.

So I believe with any type of financial solution product, whatever it is, we have to look at it within the context of the overall retirement plan, or financial plan. So with that, let me go ahead and share my screen here with you. And we will pull up our sample case study. So what we have here, this is, let me move that over there. Okay. So, we've got Jane Samples. So Jane is, let me go to this page.

She's 60 years old, and she's still working. She's making $100,000 per year. And her goal is to retire when she's 65 years old. And once she retires, she wants to retire on $4,200 per month after taxes. And then we're going to increase that to account for projected inflation over time. And then on top of that, she wants to have additional funds to account for healthcare costs.

So I'm having my software automatically calculate the projected cost for Medicare part B and D, based upon her estimated AGI, which is adjusted gross income. And then on top of that, we want to assume that she needs an additional $2,000 a year to cover out pocket healthcare costs. By the way, the reason that I have those separated is because I do assume that the cost of healthcare is going to increase at a faster rate than the overall inflation rate. That's what's been happening in certainly recent years, and I do believe that trend will continue.

But enough said on that for now. So, this is her goal. Retire at 65 on $4,200 a month, plus the healthcare costs. Again, she's 60 right now, and we've got our planning horizon as 95. So in other words, we want to make sure that she has the money that she needs and wants to have until she's 95 years old. So if she retires at 65 and needs this till 95, that's a three decade long retirement. So we've got to make sure that we have the money there, so that's the goal.

What does she have in order to make this work? Well, she's got social security. So, she's going to be able to turn that on. And what I'm actually doing, I'll show you that here first, is on the social security side. I'm going to assume that she files at age 70. Now, just keep in mind when it comes to social security, the longer you delay in taking your benefit, your own retirement benefit, your benefit will increase over time.

Due to what's called, delayed retirement credits. Now, there's no point in delaying past age 70. You won't earn any more delayed retirement credits, but she will up until the age of 70. Now, it might make sense actually for her to take her social security earlier, I'm really not analyzing this in this situation. I just want to keep this simple, but I've got her taking social security at 70. And on top of social security, to keep things very simple, I'm assuming that her only asset is just an IRA.

So she's got no money in a bank account or checking, savings, anything like that. Just want to keep this simple. So she's got $750,000 in an IRA. And the asset mix right now is about $300,000, actually it's exactly $300,000, in US equities, which are stocks. And $450,000 in us fixed income, which are bonds. So if you do the math on that, $300,000 in US equities out of 750, that's 40%. So, that's a 40% stock portfolio to a 60% bond portfolio.

Okay, which arguably might be a little bit conservative at her age, but that's a whole nother subject and such. So we'll just leave that part at that for now. So okay, let's take a look at the retirement analysis. So what this is showing is that, she has a 65% probability of success, which is not too good. I mean, she has a 35% chance of running out of money over the course of her lifetime. What's this based on? Well, in the financial planning software that I use, it runs over a thousand different Monte Carlo simulations and stress tests.

So the bottom line is, based upon all of that, in order for her to have the money that she wants and needs until she's 95, she's only got a 65% chance of this working out for her. A 35% chance that she'd run out of money. So this is where the planning begins, and we need to start taking a look to see if we can implement strategies that could increase this probability of success.

So there's several different things, obviously, we can take a look at. But for the subject of this video, we want to see if, whether it makes sense for her to buy an annuity as a part of her retirement income plan. Again, there's several different types of annuities. And the types that we're focused on here is, what if she took $450,000 and bought a fixed index annuity that has a guaranteed lifetime income benefit attached to it?

And specifically the one that I looked at, and there's several in the marketplace, and I didn't necessarily find the one that has the highest payout. I just wanted to find one of the more competitive ones quickly for this video. But if she put $450,000 as a single person at the age of 60, left it alone, when she 65, when she wants to retire in five years, she would be able to take out $32,262 per year. Or, I shouldn't say take out. She would receive a payment stream of $32,262 for life.

So, she would get that amount of money no matter how long she lives. She could be 150 years old, it wouldn't matter. The insurance company would still have to pay that money out. So that is a guaranteed amount, guaranteed by the insurance company, okay? And that's very important. Okay, so let's take a look. So she moves, remember she has a $750,000 portfolio, and she'll keep her current allocation with everything else. Her current 40% stocks, 60% bonds, but she's going to move out $450,000.

And when I say move out, what I mean, she's going to transfer it over to a traditional IRA that's an annuity IRA. And so, let's take a look. I'm going to press refresh and let's see what happens over here, because see, this is the proposed plan. So let's see the impact Huge, right? So a much higher probability of success by going ahead and purchasing that annuity. So instead of 65% probability of success, there's an 86% of success.

Now, so why does that happen? Well, let me show you something quickly here on the cash flows. Let's look at, put you here. Let's say for instance, let's go out to age 70. Because remember what's happening when she's 70 is, that's what I'm going to have her take her social security. So at age 70, we can see the income flows here, she's estimated to have about $40,000 for the year in social security. About $32,000 from the annuity, so she's going to have about $80,000 coming in between social security and the annuity.

Her expenses are projected to be about $71,000, and her projected tax payment, in other words, her total taxes are going to be under $6,000. So, she actually has more money coming in then she needs to account for her expenses and her tax payment. Specifically, she has an extra $3,080 left over. So just from the social security and the annuity income alone, she has enough. And remember, we still left $300,000 in the IRA that she could still have invested.

And right now, it's in that 40, 60 portfolio stock to bonds. So that's why this is having a much higher probability of success, because with the annuity guaranteed lifetime income payment, and of course social security, it doesn't matter what happens with the overall stock market and such. She's going to get that payment coming to her for the rest of her life. So, that's why that improved that probability of success quite a bit.

Now, one of the downsides, although it doesn't look like a huge downside in her case, is take a look at this number versus this number. You'll see that this number is a little bit less. And the reason why is, this is what's called the median number. So in other words, if we look at all the different simulations that the software ran, half of the time she would have more money than this number. And half of the time she would have less money than this number.

So there's a little bit, the median number's a little bit higher over here on the other side, on the right, on our current plan without the annuity. Not a whole lot, but the reason it would be a little bit higher is because, by just being in the investments there's the potential to earn a higher rate over time. Now there's also the potential conversely, to potentially run out of money over time. And so we're seeing that by the differences in the probability of success.

So one other quick thing that we like to look at here is to say, "Okay, well, if she's got the guaranteed income that she needs coming between social security and the annuity, and that's covering her expenses and the taxes that she's going to owe and such, and the rest of her other investment dollars she's not needing to withdraw income from, well, we don't need to worry as much about what's called sequence of returns risk."

If you're not familiar with that, I did another video on that. If I remember I'm going to include the link below this video, but because we don't need to worry about that, perhaps the extra money that's being invested, the other $300,000, perhaps we just keep that all in stocks. And so I'm just going to put most aggressive here. So this is just a hundred percent stock portfolio. Okay, so if she did that instead, remember, right now she's at 86% in the medians, pretty much 217 here. Let me press refresh and see what happens.

So interesting, right? So it actually increased the probability of success from 86 to 88. Not big, but it did increase it. But it also increased the median probability of success, or I'm sorry, the median amount quite a bit. Pretty much doubled that, more than doubled that. So, it definitely helped that quite a bit. So, does an annuity make sense as a part of her retirement income plan? Perhaps it does, right? It certainly increased her probability of success.

Now the reality is, I would also want to take a deeper dive into this and see if other strategies might be more beneficial, but this is how we want to take a look at these things. Again, annuities are neither good, nor bad. It's just appropriate or not appropriate for the particular situation. And we need to analyze on a case by case basis to see whether it makes sense within the context of your retirement plan. If you have questions, reach out. I hope this video was helpful. If it wasn't, let me know that, too. All right, take care. Talk to you soon, bye.


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