Over the last five years, stocks have climbed over 75%. Today, the average dividend yield on the S&P 500 is merely 1.87%. As a result, guaranteed income from annuities has become a popular option for retirees. But how do annuities work? And what are the pros and cons?
Over the next few minutes, Retirement Specialist Evan Belaga gives Steve McDonald the answers.
Steve McDonald: Hi, everybody. I’m Steve McDonald. Welcome to the Two-Minute Retirement Solution, and this week is a special one. Our guest is our very own insurance, long-term care, annuity expert and retirement coach Evan Belaga. He’s here to talk about how to get guaranteed income for life from your investments. Welcome, Evan.
Evan Belaga: Hi, Steve. Thank you for having me.
Steve McDonald: It’s my pleasure. Guaranteed income: This topic might just beat the popularity of the long-term care discussion we had a month or so ago.
Evan Belaga: I think you’re right on the nose.
Steve McDonald: Yeah. Talk us through a quick two-minute description. What’s an annuity and, specifically, can they really guarantee income for life?
Evan Belaga: Well, it’s simply annuities are a pretty generic term. They were started back in the Roman days for the soldiers and their families. You know, if somebody’s receiving a pension from an employer or Social Security, that’s an example of a lifetime annuity income.
Steve McDonald: OK. How do they guarantee the income?
Evan Belaga: Well, so far, $123 billion, according to the SEC, has already been invested in annuities. What they do is they take your age on an accumulated sum of money and determine how long you’re going to live, and the insurance company will guarantee you a sum of money for exactly that duration of time and pay you on a monthly or annual basis, however you choose.
Steve McDonald: And legally you can use the word “guaranteed” when it comes to these things?
Evan Belaga: Absolutely. That’s all we’re selling these days, Steve. All we’re looking for are guarantees. The carrier has to be solvent and strong. The guaranteed income has to be contractual. You can either have income for yourself for your lifetime or include your spouse and have a principal sum of money guaranteed on top of that.
Steve McDonald: OK, now I know. I was licensed in annuities at one time back in the ’90s. I didn’t do any. I didn’t really know enough about them, but I know there are umpteen-thousand types of annuities. Can you run through some of the pluses and minuses and which ones you like best for retired people looking for the safety and security that they have to have?
Evan Belaga: You know, for the sake of simplicity, income annuities come in for two purposes: You either want income now or you want income later. Those are really the only two categories that annuities fall into. You need to define the specific goal or problem you’re looking to solve. In other words, what do you want the money to do within the contractual guarantees of the carrier? So you really need to talk to someone who’s got enough carriers that they represent to go in and look for you, on your behalf, for the best guaranteed rate of return.
Steve McDonald: All right.
Evan Belaga: And then you need to determine: Do you want it for your life? Do you want to include your spouse’s life? And how important is it for your income to start – soon or down the road?
Steve McDonald: All right, well, let’s use me for an example. I’ll be 62 this year. I’m in fairly good health except my neck and back. It resembles that of an 85-year-old man. I need guaranteed income. What do I do? How much money do I need? How much income can I get? Those sorts of things.
Evan Belaga: Well, if you’re looking to start the income immediately, you could put anywhere from, you know, $50,000 to $5 million away and, depending on which carrier you use, they will make an offer to you and say this will be your guaranteed income for the balance of your lifetime. You can add a COLA (cost-of-living adjustment) on it or you can just have the level income guaranteed. If you chose to defer that decision and didn’t know quite when you wanted to take out the income… right now, the best rates in the market are earning 7% guaranteed for 10 years. Or, if you think you’re going to go longer than 10 years, you can get a guaranteed 6.5% for 20 years. And if you still think you’re outside the 20-year mark, you can get a guaranteed 6.25%. These come in the form of an income rider. So if you’re not needing your income today, you want to push it further down the road.
Steve McDonald: Let me stop you there for a second. I give you $500,000. They’ll pay me 7% a year for 10 years?
Evan Belaga: Exactly. On the income rider portion. You cannot take the 7% and put it in your pocket. What they’re going to do is they’re going to credit that to your account, and then you’re going to turn on a switch that will turn on an income stream for the balance of your life and your spouse’s life if you choose.
Steve McDonald: Interesting. OK, now I know these things aren’t free. You don’t get guarantees for nothing. But can you walk us through some of the numbers and talk about how the returns compare, say, to returns of other guaranteed sources – CDs, savings accounts, those sorts of things?
Evan Belaga: Well, there are definitely downsides, Steve. You know, the first issue is liquidity. When you buy an immediate annuity, you’re exchanging a single sum of money for an exchange of an allowance, a lifetime income. If you go in to cancel that thing, you’re not going to get your income back or your accumulation back. Your single deposit has been exchanged for a lifetime income stream. The deferred income products will earn the 7%, or you can invest in the index side, additionally, of the S&P 500. So they’ve tried to accommodate these, realizing that people need to come out from time to time. They get free withdrawal provisions. You can withdraw up to 10% of your money each year without running into any limitation or restriction or penalty from the insurance company. Like other types of qualified investments, earlier than a 59 1/2 withdrawal, you get a 10% IRS penalty.
Steve McDonald: OK, so if I did $500,000 with you and I needed to start collecting money in eight years, at age 70, let’s say, when I retire – if I do retire – and I take the 7% option, give me a ballpark of how much I can draw monthly.
Evan Belaga: We’d have to actually run the calculation because these things are done on a life expectancy basis, so if you’re 62 now, in eight years, you’d be 70. We’d simply go to the array of insurance carriers and ask them who’s going to make the best payout and earnings from now until age 70, and who’s going to pay out the most – largest sum beginning at your age, 70? So if you put in $500,000 and you earn 7%, your money will double inside of 10 years. If you then take that $1 million income stream, you should expect somewhere in the $70,000-plus a year income stream for life from that.
Steve McDonald: So they’re going to pay you almost 7% on the total?
Evan Belaga: Yeah. You’re earning your 7% and then you turn it into an income stream. And depending on what age you do that, that will determine the actual payout amount.
Steve McDonald: Right. Evan’s contact information is on the screen now – Ask@EvanBelagaCFP.com. Feel free to email him and ask any questions you have. Evan, I have a feeling you’re going to be a very busy guy for the next few weeks. What did we get the last time, 150 emails about the long-term care segments (Part 1, Part 2)?
Evan Belaga: I think we’re up over 250 by the time we counted up this week.
Steve McDonald: OK, well, guys, if you’re interested in what Evan is talking about, if you have questions – I know guaranteed income is on everybody’s mind. Send him an email; send him your questions. He will get back to you. Evan, again, thank you so much for taking the time to be with us.
Evan Belaga: Thank you so much, Steve, for having me.
Steve McDonald: It’s my pleasure. And for everybody here at the Two-Minute Retirement Solution, I’m Steve McDonald. Thanks so much for being a part of this and I’ll see you next week.