How do I create a guaranteed Income Floor?
The Annuity Man
Guaranteed income is what all of us want at the end of the day, and especially when we decide to retire. It doesn’t matter where it comes from, we just need money hitting our bank account every month to allow us to live the life we desire and have earned. That monthly turnkey amount is what I call your “Income Floor.”
So what comprises your Income Floor? Pensions (if you are so fortunate). Social Security payments. Rental income. Dividend income. Salary. Contractually guaranteed annuity payments. Your income floor is the money coming in that has nothing to do with markets or what is happening in the world. It's peace of mind money because you know it will always be there regardless of how long you live.
Annuities are what I call “gap fillers” when it comes to creating your personal income floor. What I mean by that is let’s say you need $5,000 per month to achieve your income floor. When you add up your pension, Social Security payments, and other items….that only generates $3,800 per month. So there is a $1,200 per month gap that needs to be permanently filled. This is where annuity contractual guarantees can solve than income gap.
SPIAs (Single Premium Immediate Annuities) are the most simple and efficient annuity type on the planet, and their use dates back to the Roman Times. It’s a straight transfer of risk pension product that provides a income stream you can’t outlive….and can be customized to fit your specific situation. Lifetime income guarantees are primarily based on your life expectancy at the time you take the payments, with interest rates playing a secondary pricing role. Just like Social Security, the older you are...the higher the payments.
So with the $1,200 per month “gap fill” example, we would run a quote (with all carriers) to see how much money it would take to guarantee that $1,200 monthly amount for the rest of your life. That’s what I call “reverse engineering” the quote. Instead of quoting how much income a lump sum of money will create, we figure out how much money is needed to guarantee a specific payment amount. In other words, you are quoting all carriers to find out the least amount of money needed to guarantee the monthly income.
You can also do “Income Floor” planning for payment start dates in the future (i.e. "Income Later") using DIAs (Deferred Income Annuities), QLACs (Qualified Longevity Annuity Contracts), and Income Riders. For "Income Floor" planning for payment start dates to begin within a year, SPIAs (Single Premium Immediate Annuities) are the most efficient solution and provide the highest contractual guarantees for that "Income Now" goal.
As for inflation, there is no perfect annuity product that addresses this moving and unpredictable target. COLA (Cost of Living Adjustment) increases to SPIAs, DIAs, or QLACs significantly lower the initial payments when added to a policy, so the best strategy in my opinion is to buy a SPIA when (if) inflation hits to fill that new income gap.
Remember that income annuity quotes are commodities, and should be quoted with all carriers to find the highest contractual guarantee for your specific situation. In addition, annuity quotes expire every 7 to 10 days (like a gallon of milk) and have to be requoted unless locked in during the application process.