Should you buy an annuity as a part of your retirement portfolio. In this video we will examine the pros and cons of purchasing a fixed indexed annuity with a guaranteed lifetime income rider with a portion of your retirement savings. We look at a sample case study of a couple who are ages 67 and 64. We first look at if we can improve their probability of success by adjusting their asset allocation strategy alone. Then we will take a look at incorporating this specific type of annuity as a part of their portfolio.
If they were to include the annuity in their portfolio it would provide them more security and ensure more of their retirement income is secure. On the other hand, they sacrifice the potential to have a lot more money in the future if their investment portfolio performs quite well. What's the right choice? Again, there are pros and cons to each. It's important to understand both options to make the choice that's most comfortable for you.
Should you buy an annuity as a part of your retirement portfolio? So we're going to take a look at a sample case study here. We're going to look at the pros and cons on if this couple were to buy an annuity versus if they weren't. Now there's a lot of different types of annuities that are out there and we're not going to get into all of that. We're just going to compare if they were to incorporate a fixed indexed annuity that has a guaranteed lifetime income rider that's attached to it. And so we'll talk a little bit more about that here in just a second. But let's go ahead and dive in and let me introduce you to our sample couple, which is Sam and Sally Sample. I'm calling them now they're based on a couple that I had met with not that long ago, but I've changed their names.
I've changed some of the facts around obviously. And here's their combined liquid net worth. So $525,000 and that comprises of Sam's IRA for $330,000, Sam's Roth for $100,000 and they have a joint checking account for $20,000. And this is a joint taxable brokerage account for another $75,000 here. Now they are 67 and 64 years old. She took her Social Security when she was 62. His plan is to take his Social Security at 70. Their house is paid for the healthcare expenses I factored in here separately and their combined living expenses and retirement are going to be $5,500 and we're gradually reducing that over time in the future. I'm not going to get into detail here on that part. Alright, so let's dive in. So right now, based upon all the planning that we have done so far, they had a 70% probability of success, meaning 70% chance that they would have all the money they will need and want all throughout retirement.
And for these folks, we're assuming that he lives to be 90 and that she lives to be 95. Okay? Now they were conservative as far as their investment portfolio. They were not very comfortable taking much risk and like a lot of retirees, quite frankly, this is what we're looking as far as their asset allocation, more of a 35/65 mix stocks to bonds. And in this type of portfolio, what I'm assuming here in the analysis is that they received or that they would earn over time an average annual rate of return of 5.8% with a 6.8% standard deviation. Now I've talked about that in other videos, but standard deviations of risk factor in the portfolio that the higher that number is, the more that wobble factor is of the portfolio. So all things being equal, we want that number to be lower. Now they're pretty conservative again, and one of the first things that we want to take a look at even before we look at incorporating the annuity is what if they were to get a little bit more aggressive instead of being in a 35/65 type allocation, what if they were at least to move it up, let's say to 50/50 if they were to do that, annual rate of return would be about six and a half with a standard deviation of 8.8.
Those are my assumptions here. They were to go a 60/40 portfolio, we would be assuming a 7% average annual rate of return, standard deviation of 10.2 and even one more, I'll show you. If they were to go 70/30, we're looking at about 7.5% annual rate of return with an 11.7% standard deviation. So I'm showing you that because I want you to see on this side that again, based upon their current allocation and all the planning so far, they had a 70% probability of success, which is lower than I want to see and typically I want to be at least in the eighties. And if we're at 85% and above, that's when the comfort levels is very high that they're going to have all the money that they're going to need throughout retirement. Even at a 70% though in this case, based on the analysis, it doesn't show that they could potentially run out of money until he's 89 and really the chances of that are pretty slim.
It's more likely that there would be money there later on. So this was their situation just kind of going in. Now, if they were willing to be a little bit more aggressive within their portfolio and let's say instead of a 35/65 allocation, let's say that we were to move that up to a 60/40, okay, if they were to do that, we could see this 70% number is going to move up to now 76%. And really even one more, like I was just showing you a moment ago, they were to go up to that 70/30 type portfolio. You'll see that probability of success now creeped up a little bit more now to 77%. And if we look at the confidence tab, you will see there is a potential they could run out of money even a little bit earlier. Of course, the other side of this is that they have more potential upside if the markets and their portfolio and such does perform well that they would have more money later on.
So pros and cons certainly to each of these decisions here again, for these folks in particular, they were not very comfortable taking a whole lot of risk within their portfolio like a lot of retirees. And so what we looked at here is what if we were to incorporate an annuity and this is a fixed index annuity with a guaranteed lifetime income rider that's attached to it. And so the way that that works is you put in a lump sum of money to the insurance company and they will then pay a guaranteed lifetime payment either annually or monthly. However you want that starting either immediately or at some point in the future just depending on the specific product. In this specific one, what we're just doing a comparison on is if they were to put the money in and then get money back immediately, so they're going to get a guaranteed income stream coming immediately to them.
Alright, so we're going to take a look at if they were to incorporate an annuity as a part of their portfolio, so in this case they're going to take $300,000, which is a pretty extreme example, but I want to start with this. Remember their combined liquid net worth is 525,000. So 300,000 is a big percentage of that. But just for the sake of a comparison to start, let's say they did that and put $300,000 into this annuity, when they do, they will get a guaranteed income stream starting immediately for life. They'll continue on for as long as both of them live. And if they did that, you're going to see that this probability of success number rose dramatically. I mean it's almost a hundred percent now in this case. And so on the one hand that looks fantastic, but there are pros and cons to this decision here to do this.
Now the obviously is that stability, right? In looking at the confidence tab here, the ranges on how much their remaining portfolio value could be have declined significantly because so much of their income that's coming in is now guaranteed now from that annuity. And so as you can see over here, they have no potential risk based on the analysis of ever running out of money. Okay? So that is certainly one of the pros. The downside is that they have less potential upside. I mean even if they were to live until 98 years old, which is probably beyond what they would live until, but if they were even at the high point, you could see that number there at the 95% confidence range, they have $619,000. If we were to compare that on this side, let's say that they were to keep with their current investment portfolio, which again is conservative 35/65 type allocation.
Their potential upside way down the road here is about a million dollars. So it's just a matter of in making this type of decision at least part of the thing to consider is how much do you value that stability and knowing that you have that guaranteed check coming into you every single month versus how much do you want to rely upon the performance of your investment portfolio and the markets and what are your feelings on that? And all that we've looked at so far is if you were to take either no money, not put any money in the annuity or take 300,000 and put it into the annuity, which again would be a pretty extreme example in this case. So what I want to take a look at now is to say, well, instead of doing being so extreme in doing let's say $300,000, what if these folks just took let's say $150,000, so half of that amount, what would happen there? Well, if they were to do that, I mean they're at an 82% probability of success, not at 99 obviously, but much better than 70. Their confidence level here doesn't show them potentially running out of money until age 92.
So I mean that could happen. It's not likely to happen. More likely they're going to have some money here and by putting less money in the annuity, they have more potential upside. And again, this is just in their more conservative type portfolio. If they were to get more aggressive and go to let's say even a 60/40 type portfolio here, let's take a look and see what that might do. Well from a probability of success standpoint, it actually improves it a little bit. Not much, I mean 82 to 83% now, but it does give him now more potential upside as well. And it shows that they could potentially run out of money here, whoops, when he's 88. Again, it's not likely to happen, but that is the possibility is they're taking a little bit more risk here. So there's different ways to approach this and what's comfortable for you might be very different than somebody else.
Some people are really going to value getting that guaranteed paycheck or I shouldn't say paycheck, but that guaranteed check coming in every single month in their case, they know that if I do, let's just say that extreme example again, let's put $300,000 up here. So they were to do that $300,000. They know that in retirement, whoops, went to 97%. I had changed the allocation. So if they kept their current portfolio again, just like I had it before and they were at 99%, they did that more extreme example, they would know that they would have this guaranteed income coming for life. Now the 300,000 at their ages is buying them $20,250 of lifetime income, annual lifetime income. That continues on no matter how long either one of them were to live in this case, okay? So for them, 91% of their total income's stable. The only income that, or most of all the income that's really not is those first three years before he's going to turn on his Social Security here at 70.
And so it gives him just a ton of stability and for some people this is going to be the route that you're going to want to go because a lot of people say, well gone are the days of the pensions, missed those days, that's when people were secure in retirement. Well, it's very easy to take a portion of your 401(k) or whatever else retirement savings you have, put that into an annuity and get a guaranteed lifetime income. So the only thing, three things that give that guaranteed lifetime income, annuities, Social Security and pensions. That's it. And in this particular type of an annuity, by the way, again, it's a fixed index annuity with a lifetime income rider, you're not completely sacrificing the money. There are certain types of products like a single premium immediate annuity that if you give that money to the insurance company and then that starts paying out that if you needed that lump sum back in the future that you wouldn't get that back.
You don't get that. But in this case, there is money there and the way that it would work is, and you could see the annuity value here year by year, and it is declining year by year and that's because you're withdrawing that money. Obviously the guaranteed lifetime income, there's also a fee on there on the annuity as well, on the balance, and you don't get access to the full amount. If you wanted to go in there and think you can get full access to that balance there, no, you can't do that. Generally speaking, a lot of the products give you access to like 10% of whatever the account balances for year during the surrender charge period, which could be a five year period or a 10 year period or whatever that is within that particular annuity. So it's not fully available. The one nice thing is if they were to pass away early that whatever's remaining in that annuity, whatever balance is there that does go onto their beneficiaries just like the rest of their assets.
So that is something to consider. Mostly what you want to think about if you're going to put your money into an annuity, if it is like this in this situation like I'm talking about, is that although there is some access to your money that you generally would just want to think about as the money's going in and it's providing that lifetime income. And what it's doing on the other side is it's giving you more access to your other money to spend. Because in this case, again, this is my extreme example where we're putting the 300,000, which is a large portion of these folks liquid net worth into here that almost all their income is now guaranteed. So the amount of money that they have to withdraw from their investment portfolio except for the first three years before he takes his Social Security on a percentage basis is going to be very small.
In fact, there's some years where they're not having to take any. So it is one way to go. And again, it's just a matter of what's most comfortable for you and for you and your situation. Now the bottom line here for these folks, what they ended up deciding to do, by the way, is we went with $150,000, so $150,000 here, put them at 82% probability of success. And you could see as far as the confidence level here, it doesn't show them potentially running out of money until he's 92. So this was what was comfortable for them. At the end of the day, in case you're curious, instead of going more of the 35% or 35/65 allocation, we did move that up a little bit to a 50/50 knowing that they had that guaranteed income coming in. They felt a little bit more comfortable taking a little bit more risk, but each person's situation is going to be different.
It's a matter of not only what the numbers to say, but also what's comfortable for you, what feels right for you in retirement. One other thing that I want to make mention of here is let's say they didn't go with the annuity at all. Now if they didn't, and even if they did actually to some extent for sure, remember he's not taking his Social Security till 70, so they're going to have to withdraw a lot more money for those first three years there of retirement. Again, you're seeing that right here. So they didn't have that annuity at all. They're getting a little bit of money here from her Social Security, but they're having to withdraw a lot of money from the investment portfolio. So what we would likely want to do here is to segment off a portion of their portfolio these three years and maybe move this money into cash or cash equivalents because we don't want this money into a situation where the markets go down, their investment portfolio goes down, and they're needing to withdraw significant amounts of that money in those first three years here.
So likely what we would do is incorporate a bucket type strategy. And I'm not going to get into a lot of detail, but what I mean by a bucket strategy, you might have short-term money, medium-term money, long-term money. And so what we would want to look at is that short-term money, those first three years when they're needing a lot of money initially having that money much safer in cash, cash equivalents like I was mentioning. And then the other approach then that medium term money is having more of a lower volatility type portfolio here. And then in that third bucket for the longer term money, maybe they would get a little bit more aggressive in that. So that would be another kind of approach that we could take to do more of a bucket type strategy. Again, everybody's situation's going to be different. What's comfortable for you won't be comfortable perhaps for your neighbor. And with these folks, what was comfortable for them was to take $150,000 and put it into the annuity and they got a little bit more aggressive within their investments, moved it up to a more 50/50 type allocation stocks to bonds. So hope this has been helpful. If it has, make sure that you like the video, make sure you subscribe and I'll see you in the next one. Take care.