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How to Create a Guaranteed Lifetime Income Without Losing Control of the Asset

 

You spend a lifetime accumulating assets. But at some point your investment account needs to be converted to income. Studies have indicated that nearly all of the people who are nearing retirement know they need to do this, but only 1 in 6 have a “plan”. That means 83% don’t.

Many of the available products or solutions produce an income but at the expense of losing control of the asset. But there is a new product on the market that guarantees a lifetime income without this loss of control.

But, first, lets’ take a look at some of the traditional ways to convert an asset into an income.

  1. CDs: Millions of seniors own CDs. They are safe and the person simply takes the interest as an income. However, in exchange for their safety, the yields are generally lower than other alternatives. Plus the interest is taxed. And if you spend all the income, you are running the risk of not keeping up with the increase cost of living.
  2. Annuities: Annuities typically are structured to pay more interest than a CD. The interest in tax-deferred if you leave it in the annuity and taxable if you take it out. So a little edge here. Most have a provision for taking out 10% each year without any penalties, but your principal is being depleted over time.
  3. Single Premium Immediate Annuities: In this approach, you trade your asset for a lifetime income. The good news is that the older you are, the higher the income—and the insurance company will pay it for as long as you live, even if you live to be as old as Methusila. Part of the income is taxed, but the majority generally is not. The bad news is that if you take out an SPIA and die the next day, the insurance company keeps all your money. The exception, of course, is if you set it up to pay for a certain number of years, for example, and if you die before the end of this term, the income or the unpaid balance is paid to a beneficiary or beneficiaries of your choice. The trade off is a lower income.
  4. A Mutual Fund With Withdrawals: In a rising market, this looks good on paper. You select an amount to be paid to you, say, each month and set it up so all dividends and capital gains are re-invested. If you poll seniors, you find that at their stage in life they are interested in safety and very concerned about outliving their assets. With this approach, a downturn in the market could really upset the apple cart.

TThe Life Income Annuityhere are other ways to convert as asset to income, but let’s leave it at that for now. The point is to illustrate that each of these solutions have their good and bad points.

What if you could convert your asset (CD, rollover IRA, annuity, etc.) to a guaranteed income for life without relinquishing control?
As I mentioned at the outset, there is a new product that does just that. Now there are only 5-6 insurance companies offering this approach, but you can be sure more will develop a similar product for their portfolio of choices.

Of course, each insurance company is going to have their product differences, but here is how this annuity works…

That’s right; it is an annuity, so you have all the advantages that come with annuities. Your election to receive a life income most likely will translate into a 5-7% return. The older you are, the greater the percent of your annuity account paid. Whatever the rate is, it is guaranteed for as long as you live. So no worry here about the safety or consistency of the income.

The key to this approach is that the underlying annuity remains intact. You don’t exchange your money for a life income, as in a SPIA. So, in this case you have your cake (the value of your annuity account) and can eat it too (receive a life income). You still retain control.

But it gets even better. The underlying annuity is an “equity indexed annuity”. While this is a subject all to itself, essentially an EIA provides a return tied to one of the common stock indexes, like the S&P 500. When the S&P 500 goes up, the EIA goes up. But what is unique to EIAs is that if the S&P 500 goes down, your account doesn’t. It stays the same. So you have safety and the potential to have your account grow over time—even if you are taking out an income.

This product is not just for folks in their 70’s and 80’s. A younger person could use this same approach, elect a lifetime income, but not take it. Then later, they could take what they didn’t take out in a lump sum. So a 55 year old could do it this way and buy their retirement home at age 65, for example.

This is just a quick introduction to this new product. If you think it might apply to your situation, I would encourage you to contact your financial planner.

 

 

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