||*Well, I know it's not 2020 yet, but the decade has started so poorly it would take 12 years of 15% returns for the contract value to recover to $200,000 and offer any chance of higher withdrawals. The results are quite varied depending on the market at the time the Annuity is purchased.
What is the alternative to the potential VA client that would provide the steady guaranteed income the typical client desires with no downside risk? I believe the answer is to create your own inflation adjusted annuity. How do I propose you do this? Simple. First, see the web site I've referred to in my article on Immediate Annuities. For this example, I entered 65, male, $200,000 investment. I choose Massachusetts, as that's the state I'm in. We find a monthly payment of $1350 or 6.75%. Now, the next step is most critical. It's how we transmogrify a fixed Immediate Annuity to an inflation adjusted IA. Let's start with a 5% withdrawal rate. This is exactly the rate the VA I analyzed last month started at, and it's above the suggested started rate of 4% that we tend to use for diversified portfolios. So of the $1350, only $833 is spent, the remaining $517 is invested. I chose a 3% rate of return to avoid being accused of stacking the deck. In the second year, we spend $866, up 4% from year one, and save the remaining $484. We continue until year 13 (age 77) at which time we are spending $1334 and still squirreling away $16/month. By the end of the year, the investment account has grown to $57,395. Now, in the next year, we can do one of a number of things. We can freeze spending to the $1350 per year if our expenses have leveled off, tapping that $57K kitty when needed. We can continue to inflation adjust, which would draw down the savings by age 94, and at 95 have to drop back to $1350 per month. Lastly, we can take the $57K, and get a quote for another immediate annuity. At 78, the $57K will buy a annuity yielding 12.2% or $584/mo. We then continue the process as before, with the annual increases continuing, and the excess going into the side account. It's not until 87, when the monthly spending is up to $1974 (hmmm, look at the numbers from the VA above. My concept has steady growth, no risk of a year with no increases, and exceeds the best start year above) that we are again spending all the IA income. Now, at 87, we take the money saved over the past 9 years, $39,053 and buy one last IA, giving us $583/mo. This will support continued annual increases until age 94, at which time, our monthly spending is up to $2598 (wow!) and we must use the $27,982 saved over these seven years to support further increases. This money doesn't run out until age 100.
I am compelled to point out that even though my numbers are conservative, there are always risks. The risk that rates will drop so the 3% return on the invested side money will not be achieved. The risk that a 4% inflation factor proved itself to be too conservative. But if you reread last month's "Another Look at Variable Annuities", you'll find these risks are far higher with the product I reviewed.
I've made the spreadsheet where I calculated these numbers above available for download. It helps illustrate the multiple IA purchases over the years.
Here are the details of the three IAs purchased to achieve this plan: