Episode Transcript
[00:00:00] Hello and welcome, everybody, to the Annuity Straight Talk podcast, episode number 226.
[00:00:07] My name is Brian Anderson, founder and creator of AnnuityStraightTalk.com. got all the information here for you to make solid retirement decisions, whether it uses annuities or not. We're going to talk about all of that today because I've got a really cool case study and kind of an aha moment for me where I was pretty happy to know that I created a tool that actually helped me figure out a problem. So please, like, subscribe or comment on any of your favorite podcast platforms or on YouTube, send it to your friends, ask people what they think, get some feedback, good or bad, send it to me. Makes me better at what I do. I'm happy to hear it. I would not be where I am today if had not been pressured a lot in my life and in my career.
[00:00:46] So a lot of you guys that have been watching for a while understand that. I created the calculator to test how an annuity will affect a portfolio over time. For people who think, oh, I'm going to lose some money, or I don't like losing control. I don't like this or that part of it. And it just shows you what happens to your portfolio if you eliminate or reduce the risk of sequence of returns, market volatility, all that stuff through retirement.
[00:01:12] And I've had a couple people challenge me on it. No, there is nobody else that has anything like this. Yes, there's other calculators online and there's quoting tools in different places, but this has got a patent pending with the US Patent Trademark Office.
[00:01:26] Nothing like it.
[00:01:27] And if that comes through and I get the patent on it, then it'll be official. But right now I'm protected, so that's why I can show it to you. A lot of people might think that, oh, hey, this is just your little trick to sell annuities.
[00:01:40] And I guess if I take it all the way back to where I started, understand that I didn't ever start crunching these numbers, doing these things, thinking like, oh, I want to be the best in the country at doing this. I was really trying to figure out if annuities work. And this goes way back. And these are little things that I did and they built over time.
[00:01:59] It took years to actually show some of it to people and said, hey, what do you think? And they're like, oh, it's really interesting.
[00:02:05] And that's kind of what got me here now, you know, with good feedback and with some improvements and changes, to it over time. But no, this. The goal was not to start. The goal was to just figure it out first and foremost, not to say, hey, sell an annuity. So when I come up with something like this, it's been years in the making to refine these ideas. The point of the software is to solve problems and see what works for you so you can make some decisions. Before I had this, I had a whole set of different calculators, basic calculators, time value of money, different quoting engines. You have to use a bunch of different things all in one place, kind of bring it together, make your own, and kind of found out when we were building this, it's like my goal is going to have one that does all of it, and we're getting closer to that. So one thing I tell people all the time is you've got to narrow down your retirement plan to one variable to find a solution.
[00:02:52] And a lot of times people come to me with several variables. Okay, it could be, when do you want to retire? How much income do you need?
[00:02:59] What kind of assets do you have to work with?
[00:03:02] When are you going to take Social Security? All those things. So we've got to settle those things. That's why I say make a list of the most important things. And before we get to a proposal, with or without annuities, you've got to have some of those things settled so we can get it down to one variable. So I got a case come back to me recently where we had a couple of floating variables and kind of had to figure out what the best path forward was, how we could improve the plan, see if it worked to start with, and then what improvements we can make over time. Again, it's another person completely separate from a couple podcasts Before I met this guy three years ago.
[00:03:33] First the idea was to talk him out of buying something that would not have been the right fit for him. He's followed along since. Now he's a couple years away from retirement. He's had good market performance, he's been saving money.
[00:03:44] He's in a stronger position and has, you know, a better idea of what he's really looking for. Several questions left. Still, he's got the money available to retire the way he wants, but doing it with the highest level of efficiency takes some precision, and it's going to be necessary to, you know, give him the real comfort that his assets will do what he needs them to do, what he wants them to do. I wanted to start with Social Security to get that out of the way. So he's 61 and his wife is 55.
[00:04:09] They want to retire at the end of 2027. We've got a little bit of time left, about a year and a half to do this. They want to wait until age 70 to take Social Security. So that means the biggest expense of retirement is going to come in the early years when all the expenses come from savings and investments. So I've always suggested it's usually best to take Social Security, but it's hard to ignore the higher payouts available for waiting. Wow. If we can just wait, that's going to cover so much more of it. But then it costs something up front.
[00:04:35] And I'm not just. In any case, I'm not just going to offer my opinion. It was better to step back and analyze the cash flows in relation to the spending needs. It showed me a brand new way to look at Social Security at a time when I really thought I had it all figured out. So we got to be humble and realize. And again, for everybody else, I'm going to show you what the solution was for these guys. But it's not a one size fits all. It doesn't necessarily work for you. Even if you're the same age who. Right. Spending needs timing, market timing, your expectations, your risk tolerance, all those things are going to change it dramatically for you. One lesson we need to keep in mind, if you are retired and you plan to delay Social Security, spending needs come from other assets. When you're doing that, that initial cost is almost never factored into the calculation that determines which claiming strategy is most effective.
[00:05:25] The easiest way I found to do it is to build a spreadsheet and subtract the annual cash flows you expect from the annual spending needs. All right, so if you have no Inc.
[00:05:35] In the first three years of retirement and you have X number of spending needs, then that's all going to be added up into money that you got to come up with out of your own pocket. So you're going to get an annual gap. And if you extend the calculation, in this case, we went for 25 years because one of them is only 55, we can go longer as well. You'll get a cumulative amount showing the total cost of retirement. For instance, if Your gap is 20,000 in the first year, 20,000 in the second year, or 20,000 every year for that matter, your total gap in Today's dollars over 20 years would be $400,000. Right.
[00:06:08] So when I did that and I calculated the numbers, in this case, the cheapest way to finance the Retirement they want is for these guys to wait until full retirement age of 66. Taking early Social Security produces a total gap that's for all 25 years of 200,000 more than anything else over the years. Waiting till age 70 is about 70,000 more expensive. So this is actually what it looks like. If they claim it 62, their total income gap is 2,090,000. That's in today's dollars. What, like all the years cumulatively? Okay, if they claim Social Security at 66, the total income gap is 1,884,000. So that's about $206,000 cheaper to wait a few more years.
[00:06:52] And claiming Social Security is still lower. 1,000,009,45. That's 70,000 more expensive than taking it at 66.
[00:07:00] So it's easy to see that claiming at 66 is the cheapest way for this couple to retire.
[00:07:05] This is where it gets new for me and why I want to share it all with you guys. Because there's a different way of thinking about it. And this is amounts to another situation where in the past when I was figuring some of these things out, I'd come across something and crunch the numbers and it seemed brilliant. Oh my goodness, this is brilliant. I'm going to be rich. I'm going to be the smartest guy in the world, only to find out that somebody wrote a book about it 40 years ago. Still a good idea, but it wasn't original. Okay, so there could be somebody out there, and I certainly have, and I can talk about it a little bit. Seen other people do this. So use the calculator to simulate market performance in relation to each of the above cash flow scenarios. In order to see which is best, we need to see how their portfolio performs and handles various market scenarios. Timing of returns in the portfolio will undoubtedly be affected by the guaranteed income payments, will it not?
[00:07:52] Once we can see that, we'll be able to test various options for altering the portfolio to see if improvements can be made. I'm going to explain in the newsletter. I kind of explain it, but I'm going to go to the calculator on the video for everybody. So you guys want to check this out and I'm going to share my screen. Now I've got all these pre filled in, so I'm not going to do all the inputs here.
[00:08:16] All right. By each of them claiming age 62, as you can see on the deal, 2 million in total assets, $140,000 yearly income goal, they are 61 and 55. So the youngest is 55. And income starts in two years. That's when they're going to start drawing 140,000. The oldest one takes Social Security right away. In the worst 25 years, 100% stocks.
[00:08:40] You stay in the market the whole time, you're going to go broke. So what we can see here is the additional incoming cash flows will start 21,000 in the first year. I accounted for their birthdays in the middle of the year. So that's partial year payments and then 32,000 going on. And then when the wife's kicks in, there's 44,000 first year, 55,000 ongoing.
[00:09:00] These are the income you have to do. And again, if the market's down in value drop from principal, if it's up. So the result of that scenario is that portfolio goes to in the worst case scenario. Not saying we're going to repeat that, but this is what we want to keep in mind. So about the 14th year is when that portfolio goes to zero and then they're stuck with their Social Security is it. But in the past, when in a good market scenario they've got almost two and a quarter million dollars, that works really well. So there's a big difference there. Right now the next one is if they wait until 66, same thing.
[00:09:35] Income starts in two years. That's when they start drawing from the portfolio. But they don't start getting guaranteed income from Social Security until four years later. If we look at this again, those additional incomes are delayed, meaning they're drawing more from their portfolio up front.
[00:09:51] So they went from two and a quarter to 2.4 in the last 25. And in the worst 25, it actually failed a year earlier. That's because of more large withdrawals at the beginning. And finally let's look at claiming at 70, same thing.
[00:10:05] And that's actually the worst scenario for them.
[00:10:08] The portfolio fails in about the 10th or 11th year. And after a good market scenario, past 25 years, really good, except for there's four down years in that whole thing. Really good market performance.
[00:10:22] They're only just shy of 1.4 million.
[00:10:25] Now, not only does claiming Social Security at 66 result in the least overall cost, but it also produces the best overall portfolio performance. This is a new way of looking at Social Security that I've never seen before. I'm not going to claim it's some groundbreaking discovery I have because I do actually know some people have, hey, well, the market took a hit so we decided to take our Social Security early. That happens.
[00:10:48] This is just another way to Factor that into your planning and it's easy to keep in mind. It's not just about, hey, the cash flow is this, that break evens there. I'm going to take it early, I'm going to wait all those things. It's different for everyone. Stands to reason that heavy withdrawals put a portfolio in serious danger. If volatility is present in the early years, that's the riskiest time of retirement. Prudential did a study on it years ago. They used to run it as the retirement red zone five years before. First five years of that's your most dangerous time. Five years before, that's when everybody's kind of buying annuities to protect and make sure they get into those easygoing years. After five years into retirement, that's when things should be locked and set. And then also when the market's good, if you're leaving more money at work in the market, it's going to produce larger values. That's pretty evident math right there. If the cheapest strategy leaves more money working in the market, when the market's good, then it's going to create a bigger portfolio. Nothing crazy about that. But I do not like a portfolio that has a chance of failing. So let's look at ways of giving this couple more assurance of success in the years ahead. Now, I know you guys all expect me to go straight to annuities. That is not the first move these guys should make. It's almost never the first move. We got to figure out some other things first. Like I said, Prudentials retirement red zone, the biggest risk in retirement is in the first few years. Consequently, that's when these guys are taking their biggest distributions.
[00:12:05] Because there's not a lot to gain by short term compounding for the first few years. My first idea is remove that risk entirely and set aside enough money to cover the first three to four years of spending until Social Security kicks in. When the older person is 66. That's what I think.
[00:12:23] So I ran a number. If they get 4% on their cash, they could use a couple of mygas if they wanted to for, you know, three, four, five years out or, you know, CDs for real, short term, whatever they want to do. 20% of their money in liquid cash means they won't rely on the market. And that will cover everything until the husband turns 66 and starts taking Social Security. That alone. And I'll show you the next scenario if we do that. Now, what we're looking at is if you see on the screen, total assets now 1.6 million. So that was 400,000.
[00:12:52] It was actually 410,000. I just rounded it and that was at 4% to cover the cash flow they need for three and a half years. I think it was pretty simple. So what that happens is, well, you still see a failing portfolio in worst 25 years, but it lasts for 20 years. In that scenario, it's quite a bit better.
[00:13:12] And then the last 25 in a good market scenario, they're up to nearly 2.9. When the market is positive, one small reposition, no sale involved, dramatically improve the situation.
[00:13:24] We got to go further if we want to make a plan that can't fail. Right. Well, it is an annuity podcast. So I threw out a number, ended up working really well. What if they take one quarter of their portfolio and put that into a deferred income annuity that pays in five years? When they start taking Social Security, they got 400 aside to cover the first few years of retirement. They put another 500. That means they got 1.1 left to grow. It's 20% in cash, 25 in annuity, and 55% of the money still in the stock market. Dang close to the 6040 blend they're going to be told to do anyway if they don't use an annuity. Keeps them very liquid with plenty of upside potential.
[00:13:58] So that's the next scenario here. Boom.
[00:14:01] If the market does well over the first few years, they're going to be a real strong position. If it doesn't do well, they have nothing to worry about and can wait for a recovery without sacrificing their lifestyle. It's covered. Results of this scenario, 1.136 million remaining. In the worst case scenario, they survived 25 years of total financial calamity. And in the past 25, when the market's good, they're up to $3.6 million.
[00:14:27] So $700,000 improvement over just that part of it. And the point is, again, you can see here on the screen, 46,284 annual lifetime income, joint life starting when she's 60. They're going to break even before she's 71.
[00:14:45] Holy cow. That's going to pay out a lot of money over lifetime. And if we look here, all we're doing is reducing the stress on the portfolio so that it grows more. Oh, my goodness, they have more money now.
[00:14:58] We can start planning for inflation adjustments and all that stuff.
[00:15:02] Yeah, I took a stab at the initial amount in the annuity. When you increase the annuity it does not increase the remainders as much as it decreases it when you decrease the amount in the annuity. So I got lucky. But I kind of have an idea what I'm looking at. And these are these two time periods. So you use this and you bounce them back and forth between time periods.
[00:15:20] Two, decide where's your blend, where's your mix? Now I want to reinforce that. I'm showing you number one, this whole process here is different than what you're going to see anywhere else. I'm going to show you what a lot of their advisors do because people come to me and tell me this, oh, they told me to delay Social Security, buy an annuity that starts when we want to retire. So the last scenario is forget the cash on the side. Just put 900,000 bucks into the annuity and have that pay off at age when the wife is 57 and the husband's 63. Right.
[00:15:49] Well, you have, in the worst 25 years you've got 446 left.
[00:15:56] So you're down about 6, 700,000 in both scenarios.
[00:16:00] This is what guys are going to look at it and they say, hey look, you're fine. Worst case, yeah, that's bad. But what are the chances of that happening again?
[00:16:07] So I'm selling half the annuity and creating a substantially more higher amount of money. Again, I want to sell it. Nine hundred thousand dollar annuity, but not at your cost. There you have it. That's what the calculator can do. There's a lot of inputs on the side that I did and I skipped for the purposes of kind of being efficient with time here. But this is essentially what we do on all of this stuff. These guys have a lot of decisions to make. We'll get an opportunity probably to test different scenarios when the annuity income starts, when Social Security starts. We could talk about different claiming strategies for the two of them. This is as simple as I can make it at the beginning. Two at least hopefully get closer to sorting this thing out for him. So this calculator is awesome. I'm really psyched that it helps me as much as it can help you. It makes my job easier. We get to spend more time really figuring out the details rather than shuffling back and forth between calculators and yellow pads and do all that stuff. These guys can get it exactly where they want and we're really close to having built that to begin with. We can do the same thing for any of you. It doesn't have to start with an annuity and oftentimes it's best to analyze other parts of the plan first, get everything else settled and then figure out the final touch.
[00:17:14] So this is the best way to do retirement planning. So everything is carefully thought out. If you want to solve your equation, get on my calendar. We can start to figure it out. My name is Brian Anderson. This has been episode 226, another calculator case study. Please like subscribe or comment on any of your favorite podcast platforms or on YouTube.
[00:17:33] Schedule a call at the top right corner of any page on annuitystraighttalk.com thank you so much for joining me. I will be back next week for episode number 227. You guys have a great day. Okay, bye.
