Boost Guaranteed Lifetime Income up to 100K

Michael Lewis, author of “Moneyball,” pointed out at a recent industry conference that “experts make mistakes, and analyzing data can help prevent gut calls that become bad decisions.” The Oakland A’s dissected statistics and analyzed data to identify undervalued players. The process became known as the “Moneyball” method and is now used in all major sports. This same process of identifying and exploiting inefficiencies can be applied to any problem, such as increasing retirement income. The rewards for continuing to defer an income rider payout option is counter-intuitive to the average investor who is used to being rewarded for allowing the magic of compound interest to work over time. It doesn’t help when most of the brochures focus on the compounding of the income account value.

Imagine if you could engineer a $30,000 to $150,000 increase in your total guaranteed lifetime income benefit payments (GLIB rider) and prove it mathematically. The following example will show you how to increase potential lifetime guaranteed income by calculating the Optimum Starting Point to turn on optional income rider payments.

Many advisors know how to sell income benefits riders, but few have taken the time to determine how to maximize the payout based on their client’s individual objectives. This article is going to teach you how to identify the power curve, where you would receive the maximum payout based on your objective. You will also learn how to quickly identify inefficiencies to your maximum benefit.

We will start from the premise that you already own an annuity with an income rider, and you want to generate the largest possible return for the additional charges incurred. I am also going to assume account value is not a primary concern. We will determine the Optimum Starting Point of the income rider to increase the likelihood that your client receives the largest total payout and rate of return by calculating the best time to activate the rider for your specific contract and desired end point.

On the surface, Guaranteed Lifetime Income Riders are designed to provide security from running out of money, in exchange for an additional expense called a rider charge. There is, however, no such thing as a free lunch, and you need to very carefully identify the quid-pro-quo. These riders are designed to create an actuarial profit for the carriers that make them available on their various annuity contracts. It is best if you think of an income rider as an option, but not an obligation to start a minimum withdrawal amount at some point in the future. The brochure may discuss various guaranteed interest “roll-up” rates for the income account, which is called a secondary account feature. This secondary account is only used for calculating income payments and is not to be confused with the accumulation value and can not be removed as a lump sum–so you and your clients need to understand the math. 

Once you own an annuity with an Income Rider, you basically have three options relative to the rider itself:

1: Turn the payments on immediately.
2: Turn the payments on later (defer).  
3: Never turn the payments on (ignore or cancel).

Many agents automatically advise clients to defer as long as possible before turning on an income rider, because the income account is growing at a certain rate of return (such as 6, 7 or 8 percent). This is an overgeneralization that could cost you tens of thousands of dollars, as in our examples below.

The brochure language is designed to get you excited about certain aspects of an annuity that may or may not create value for you. As an example, a certain annuity or rider may double the income account value after a 10 year period, but the actual value/return enjoyed by you is not determined solely by the size of the income account.

Taken individually, income account bonuses, guaranteed roll-up rates up rates, and income account size is meaningless. The carrier could provide 10 percent roll-up and then recapture that “marketing calculation” with a reduced 4.0% payout factor. The only way to cut through the fog is to focus on the factors that are important to calculate the internal rate of return probabilistically.

If we want to view this as a formula, we know the current account value and your age. We can calculate the income payouts from the statement or contract for various income start ages. We can also use probabilities and your health history to select a likely ending point for the income. As long as we use the same calculation summary age for the various income rider start ages, we can determine if there is value to be gained by using a different starting age. We would you determine what survival probability with which you feel most comfortable.

The factors that determine the ultimate value received by you are:

1: Current Account Value
2: Age of Client when they Start Income
3: Amount of Income Payment
4: Rider Charges
5: How Long the You Live and Receives Income
6: Ending Account Value (we are using zero growth for this article because we are only evaluating the income rider portion)

Reasons to Turn It On Now
Since one of the “known knowns” is mortality, I always start with the hypothesis that the earlier you turn on the income rider, the better the odds that you are going to live long enough to receive an amount greater than their principal:

  • If it is a variable annuity and the account is substantially underwater. I have seen IRR’s as high as 9% through age 85 because the account value was substantially underwater.
  • If you are older than 70, have a cap and are paying a fee.
  • The roll-up period is over.
  • You need the income now.

Reason to Turn It On Later (Defer) 
The next step is to determine if there are any significant changes in the rollup values. This is done in order to evaluate whether the payout of deferring is real or imagined when juxtaposed against probable life expectancy and calculation age. A common error is that many of us grew up with a “saver’s mentality,” and feel that the longer they let the income rider compound, the better. The trade-off is that, for every year you increase the size of the payment because of roll-up and payout factors, you are also one year closer to death. By calculating the IRR at your agreed upon life expectancy age, you can quickly determine the Optimal Starting Point for your needs.

To determine the IRR (Internal Rate of Return) at a chosen calculation age, we will need the current account value (not income account), your current age, and the guaranteed income payout for the ages we want to test. So using a sample set of data:

Current Age: 65 (Male) 
Current Account Value: $200,000
Accumulation Growth Assumption: 0%
Rider Charge: 1%
Calculation Age: 85

We determined the payout factors and income below–for each starting age of 65 through 80–in order to determine the sweet spot. The object is to provide the largest possible return through age 85 based on our calculations. The table below was created using payouts calculated at and using for IRR calculations. Payout factors will vary widely based on carrier, your age, desired calculation age, and charges.

Total Payouts and IRR through Age 85
Start Age Payout Amount Payout Years Total Value (85) IRR
65 $10,584 20 $211,680 0.61%
66 $11,502 19 $218,538 0.90%
67 $12,495 18 $224,910 1.14%
68 $13,568 17 $230,656 1.32%
69 $14,727 16 $235,632 1.46%
70 $15,981 15 $239,715 1.54%
71 $17,355 14 $242,970 1.59%
72 $18,797 13 $244,361 1.57%
73 $20,376 12 $244,512 1.51%
74 $22,081 11 $242,891 1.40%
75 $23,922 10 $239,220 1.25%
76 $24,328 9 $218,952 0.61%
77 $24,733 8 $197,864 -0.07%
78 $25,139 7 $175,973 -0.80%
79 $25,544 6 $168,857 -1.0%
80 $25,950 5 $167,422 -1.0%

“Income rider deferral is your friend until the end when it bends.”

As long as there are no other factors in the decision, turning on income at age 71 would create the highest IRR in this particular case.  If there were a need for income prior to this date, you could simply take withdrawals. The total payout increase between starting ages of 65 and 71 is $31,290.

Now we will look at the same calculations using age 95 as the calculation age.

Current Age: 65 (Male)

Current Account Value: $200,000
Accumulation Growth Assumption: 0%
Rider Charge: 1%
Calculation Age: 95

Total Payouts and IRR through Age 95
Start Age Payout Amount Payout Years Total Value (95) IRR
65 $10,584 30 $317,520 3.65%
66 $11,502 29 $333,558 3.80%
67 $12,495 28 $349,860 4.01%
68 $13,568 27 $366,226 4.18%
69 $14,727 26 $382,902 4.33%
70 $15,981 25 $399,525 4.45%
71 $17,355 24 $416,520 4.56%
72 $18,797 23 $432,331 4.64%
73 $20,376 22 $448,272 4.70%
74 $22,081 21 $463,701 4.74%
75 $23,922 20 $478.440 4.77%
76 $24,328 19 $462,232 4.42%
77 $24,733 18 $445,194 4.09%
78 $25,139 17 $427,363 3.76%
79 $25,544 16 $408,704 3.44%
80 $25,950 15 $389,250 3.12%

In the example, using age 95 as our target age, turning on income at age 75 would create the highest IRR.  If there were a need for income prior to this date, you could simply take withdrawals. The total payout increase between starting at 70 vs 75 is an additional $78,915. The increase in payouts is hypothetical because mortality is never guaranteed, and you can never calculate the final IRR going forward (such as with a fixed interest rate)–only looking back from the final point. The purpose of the process is to determine Optimum Starting Point based on your perceived ending point.

Turn It Off
In many cases, you won’t want to turn the rider on at all. The following situations may benefit more from systematic withdrawal strategy:

  • You are beyond age 75. It is statistically difficult to benefit from an income rider that has not been activated unless you have a reason to believe that you are going to live substantially beyond normal life expectancy or have a very low accumulation value compared to the income payouts.
  • You have Substandard health concerns.
  • Your income needs are met through other sources (such as pensions).
  • Your objective is leaving maximum for heirs.
  • You are wealthy and want to maximize growth.

Income riders are a great invention, but there are significant pitfalls if you don’t understand how to maximize the payouts. There are definite trade-offs that you need to be able to calculate if you wish to be operating in a true fiduciary capacity.

 While many of the annuities with income riders also have a growth component, we left those out of this exercise because we are focusing on evaluating the income rider Internal Rate of Return, independent of the cash values.



2 comments… add one
  • Joe Gordon Apr 29, 2017 @ 8:39

    Since most of the funds available these days are in IRAs, does it change your calculation at all depending on tax rate assumptions as well?

    • Steve Hutchinson Apr 29, 2017 @ 8:49

      No. Required minimum distributions would affect (reduce) the account balance because of mandatory withdrawals, but the optimum starting point would remain the same regardless of account size. If we are optimizing to age 90, for instance, and the IRR for that particular product is highest using a starting age of 72, then that is the point that will generate the largest return through age 90. Taxes are a secondary consideration. We are focused on the largest possible payout from an actuarial perspective.

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