Don’t You Want a Safe Retirement with “Guaranteed Income”?
I recently did a one on one retirement optimization workshop with a 65-year-old teacher I’ll call Sally who was retiring on January 1, 2024 and wanted an annual income stream. Sally had a lump sum of $100,000. Her “free financial advisor” told her, “Don’t you want a safe retirement with guaranteed income”? “Guaranteed income” and “risk-free “ are euphemisms for a high hidden fee, high commission, and extremely complex financial product called an ANNUITY.
I wanted to share with you the comparison that we did to see what is her best option. The first scenario is buying an Immediate Single Premium Annuity from her “free Financial advisor” that held a presentation at her school. The second scenario is putting her $100,000 in a low cost S&P index fund and setting up a withdrawal schedule.
Scenario A: Purchase Immediate Guaranteed Single Premium Annuity
In this scenario, Sally buys a $100,000 Immediate Guaranteed Single Premium Annuity from an insurance company. Beginning January 1, 2004, Sally would receive $568 a month or $6,816 annually as long as she lives. Her initial principal of $100,000 does not grow. When she dies her beneficiary will receive her initial investment of $100,000 minus the sum of all of her payments. If she dies at 85, she will have received payments totaling $136,000, so there would be no money left for her beneficiary.
Scenario B: Low Cost S&P Index Fund
In this example, Sally invests $100,000 in a low cost S&P 500 index fund. The average return for the S&P 500 for 35 years is 10.34%. The expense of a low cost index fund like Vanguard (VFIAX) is .04% or Fidelity (FXAIX) is .015%. I used the withdrawal calculator Retirement Withdrawal Calculator |- MyCalculators.com to set up a schedule for Sally to have a consistent income stream until she reaches the age of 100. I assumed a return of 10%. She would withdraw $9,426.34 annually or $785.52 per month. Since her principal is growing, if she dies at age 85 her beneficiary would receive $73,654.
What should Sally do?
In Scenario A, Sally receives $6,816 annually. In Scenario B, Sally can withdraw $9,426 annually, which is 38% more money annually than Scenario A. In the low cost index fund scenario Sally can change her mind and withdraw her money or change her investments with no penalty (other than taxes). In the Immediate Annuity scenario, once she takes the first payment she is locked in for life. She no longer has access to her principle.
NOT FINANCIAL ADVICE
The information contained in this article is for informational purposes only and shall not be understood or construed as financial advice. I am not an attorney, accountant, or financial advisor, nor am I holding myself out to be. I do not accept any fees or commissions from anyone or any financial institution.
I’d love any feedback on these articles.
