Convert retirement assets to cash flow that will last for the lives of married couple.
THE SOLUTION:
Joint and Survivor Immediate Annuity
Case Study
Background
Lisa and Steve spent their careers accumulating assets for retirement. They had CDs, mutual funds, sizable 401(k)s, life insurance cash value, and annuities, mostly in qualified assets. As they approached retirement they became concerned about how to turn those assets into monthly cash flow. Other than their social security payments, they had no idea how to take money from their various assets to fund recurring monthly expenses. They were fearful to retire and lose the security of paychecks that provided income on a regular basis.
Though they had a comfortable amount saved, they also were concerned about using too much of their savings too quickly and running out of money. Should they access their qualified money from their 401(k) plans or use their personal assets first? They just did not know how to proceed.
Considerations
They met with their longtime financial advisor and shared their concerns. He took out two sheets of paper and on the first sheet he listed and categorized all of their investment assets (qualified or non-qualified; liquid or non-liquid) and on the second he helped them list all their recurring monthly expenses. From the recurring expenses he subtracted any recurring income sources, such as social security. What was left were the recurring expenses not covered by cash flow.
Once he determined how much unmet monthly income was needed, he then turned to the investment asset sheet and discussed which assets would work best to provide them the monthly income they needed.
Their two largest assets were their 401(k) plans. Since a majority of their assets were in the 401(k) plans and their other non-qualified assets were a minority of their savings, he recommended they take a portion of the smaller 401(k) plan and fund a Joint and Survivor Immediate Annuity. This would allow them to cover their unmet cash flow needs while maintaining the liquidity of their non-qualified accessible assets.
Solution
Lisa and Steve liked the monthly income an immediate annuity would provide but wanted to make sure they would be prepared in case their expenses increased in the future. Their advisor explained that they could purchase an immediate annuity now and plan to purchase an additional annuity in later years if they needed it. Alternatively, they could choose to purchase an immediate annuity with an inflation factor built in to increase the monthly income each year to cover the increases in costs.
The immediate annuity would provide income that would continue for both of their lives. By purchasing an immediate annuity to cover recurring expenses, they could leave other assets to grow while they live off the cash flow. If markets were good they could access their other assets to take a vacation, purchase a new car, or other financial outlay and be able to pull back and not touch these assets when in a down market when their asset values were declining.