By Melvin Samick, Excalibur Life Insurance & Annuity Solutions
My name is Mel Samick. My topic of discussion is, how to create your own pension using an annuity. I want to bring this up because a pension creates lifetime income. We know the importance of creating, not an accumulation plan, but an income plan, one that you cannot outlive on a guaranteed basis. Pensions are exclusive. Exclusive in the fact that not everyone has one. They are mostly offered through government-mandated jobs, firefighters, teachers, police officers. The promise that you work here for this job, when you retire, you will have lifetime payments no matter what, and that is a contractual guarantee. I want to show you how you can create your very own pension by using an annuity.
Annuities, social security, and pensions. They offer the same thing, that lifetime income. We talk about de-risking your retirement portfolio. When I say de-risk, what do I mean? What are the risks we are protecting you from? I have broken that down into four main risks.
The first one being, stock market volatility. If you look at your retirement accounts, if the market goes below zero, doesn’t your account values drop below zero as well? Have you considered the risk that you may lose money to market volatility?
Next one, inflation. We know today’s dollars are not the same as tomorrow’s dollars, so when you are accessing income that you have created in your plan, did you account for inflation? Wouldn’t it benefit you to have an increasing income in your guaranteed paycheck each year to account for inflation risk?
The next one we have analyzed, “sequence of returns”. We all love the positive returns, every time the market goes up, my account values go up. What happens when you have consecutive negative market years? When this happens, how does it affect your account? If it happens in the last 3-years, just before retirement, does the negative impact on your retirement account affect your future withdrawals versus your account growing 3-years before retirement?
Lastly, longevity. I call this, the risk multiplier. The longer you live, the more you are subject to volatility, higher inflation, and losing money based on a negative sequence of returns.
If you live to 90, 95, or 100, you need a plan that can take you all the way to those ages. When we talk about risk, we want to use guaranteed retirement income to mitigate these risks. What do I mean when I say retirement income? I mean that it is guaranteed for life. Meaning it is a contractual guarantee that no matter when you pass away, whatever that date is, you will have income until that day.
There are three sources where guaranteed income comes from.
The government through social security, an employer through a pension, and then lastly what we are talking about today, using an annuity.
We are using an annuity from an A-Rated insurance carrier to create that contract, to provide those guarantees. No matter what happens during your life, you have an income plan for you and your spouse’s entire life. Even if your cash in the annuity goes to zero, your income never stops.
You fund your social security through your income taxes, your pension through an employer, and your annuity through premiums that you set aside from either your cash and investment accounts, IRA’s or a 401-k during your working years.
When that account value runs out to zero from the government, from your employer, from the insurance carrier, the promise is that you will continue these payments through the rest of your life.
Here is an example of an annuity (it can be a 401-k or an IRA) verses having money invested in the market in your 401-k or IRA account. Each client has one million dollars. The 2 clients are each 56-years-old and they will begin taking a distribution at age 69.
We are going to compare the annuity versus a steady 6% rate of return from the brokerage account. I am being more than fair with my comparison, where can you receive a 6% gain each year with no market losses.
What does it look like when we stress test it based on an income plan? If we look at age 69, our annuity has grown to $1.5 million in that bucket. The steady 6% return, a little bit more, $1.8 million.
With the annuity we are going to draw $125,000 per year in guaranteed income, which our annuity produces. The annuity that I am using in this example, the income can increase yearly based on positive market performance, this helps offset the effects of future inflation.
We will use the same formula on the money invested in the market receiving a steady 6% rate of return.
If we look at the steady 6% return first, the total income we have taken is $2.7 million, and the income expires at age 85. The money runs out, so we either must keep funding it or go back to work.
With the annuity plan. We are leveraging the insurance carrier to pay us out each year on an increasing basis, this is called a mortality credit and only an annuity can provide this for you. By 95, we have taken a total income of $6.5 million.
The most important part of this product is that the income continues for life. When this account value runs out to zero, the contractual guarantee from the insurance carrier, “Continues paying you.”
If you have money in an retirement account, if going broke when you get older is a concern, it would be in your best interest to speak with me, Mel Samick your financial professional in the guaranteed income market. I can show you how you can incorporate an annuity into your retirement plan to mitigate these risks we discussed in this article.
Here is to guaranteed income for life and never running out of money in retirement.
Mel Samick
Who is Melvin Samick
Wealth Coach, President of Excalibur Life Insurance and Annuity Solutions
(888)839-3536 | melsamick@msn.com
As an independent financial advisor and an active member of the community, Melvin Samick is dedicated to helping individuals, families, and businesses attain peace of mind and financial freedom.
For years, I have studied the characteristics of wealth accumulation vehicles and have concluded that there is an underlying commonality among the individuals who are best positioned for financial success in retirement. All of these individuals, have been educated on the financial principles of how to grow, protect, and transfer wealth in retirement.