Forecasting your financial future can be difficult, but it doesn’t have to be.
In retirement, we all want to ensure our living expenses are covered while having enough money to enjoy life. Asking the right questions and protecting what matters most can support clarity for a confident future.
Meet Dave and Lynn
In 2027, they’ll both reach their retirement age of 65 and will likely need stable, lifetime income to provide the comfort and protection they’ve worked hard to earn. However, their only source of protected retirement income is Social Security, and they’re wondering if that will be enough.
This hypothetical example is for illustrative purposes only and is not representative of the past or future performance of any product. Past performance is no guarantee of future results.
What are they protecting?
For Dave and Lynn, preparing for a financially secure retirement includes securing their necessities such as a home, business or car. It also involves taking steps to help ensure they can maintain their high quality of life.
Protecting their health and lifestyle can also be costly, so taking a holistic view of their retirement to ensure they have sufficient income is essential.
Home
Business
Car
Retirement
Health
Lifestyle
And what are they protecting against?
There are several factors that can impact the life Dave and Lynn want to live in retirement.
Longevity
How long they both will live and need income.
Inflation
How much their nest egg will be worth in the future compared to now.
Volatility
How market fluctuations can impact their savings.
Low interest rates
How low rates can reduce their investment returns.
Many of us are worried about our financial goals,
Dave and Lynn included.
of people worry that their retirement savings may not be enough to live on.1
Potentially running out of money in retirement is a concern for Dave and Lynn. One way they can reduce the risk of running out of money is by increasing their protected lifetime income.*
A financial tool to help bridge the gap between what they have and what they’ll need in retirement may help.
1. Alliance for Lifetime Income, 2020 Protected Lifetime Income Study and Segmentation Report, October 26, 2020.
An annuity may help bridge the gap.
Why an annuity?
An annuity would allow Dave and Lynn to invest their money for potential tax-deferred** growth, which they’ll then receive as income when they retire. The income is available to withdraw when they need it, which can help bridge the gap between what they have in savings and what they’ll need. It’s like wrapping their retirement in an insurance policy.
What is an annuity?
An annuity is a long-term, tax-deferred vehicle designed for retirement. Variable annuities involve investment risks and may lose value. Earnings are taxable as ordinary income when distributed and may be subject to a 10% additional tax if withdrawn prior to age 59½.
Dave and Lynn chose a variable annuity.
Types of annuities
Fixed annuity
Avoids market volatility while also offering the benefits of guaranteed growth.
Fixed indexed annuity
Provides protection as well as potential interest growth measured by a market index.
Registered index-linked annuity (RILA)
Offers a balance between growth potential and downside protection.
Variable annuity
Offers the opportunity to choose investments and grow assets, tax deferred.
Dave and Lynn chose a variable annuity with an add-on living benefit.
Why a variable annuity?
With a variable annuity, Dave and Lynn can spread their wealth across a range of investment options, which may help grow their assets, tax deferred. This annuity involves investment risks and may lose value. However, many variable annuities also offer add-on benefits, available for an extra cost, which can soften the impact of market losses and ensure predictable income insulated from market volatility.
What’s an add-on living benefit?
If Dave and Lynn want the investment potential of a variable annuity and also want the protection of guaranteed income, they can purchase an add-on living benefit with their variable annuity.
This can provide a guaranteed amount of income each month for a set period, or for life—even if the amount paid out is greater than the value of their contract.
How can a variable annuity work for them?
Dave and Lynn have a portfolio totaling $1 million, and prior to purchasing a variable annuity with an add-on living benefit, Social Security was their only source of retirement income.
By allocating 30% of their $1 million portfolio to their annuity and electing their add-on living benefit, more of Dave and Lynn’s expenses are covered by stable, protected income that will last the rest of their lives.
$1 million portfolio
allocated to an annuity
Let’s crunch some numbers.
By purchasing a variable annuity with an add-on living benefit, Dave and Lynn can have an additional source of guaranteed income. In their case, this income will fund approximately 20% more of their total expenses.
When comparing their retirement with and without an annuity, the numbers speak for themselves.
 Total Expenses |
$5,655,366 |
 Guaranteed Income |
$2,238,419 |
 Unfunded Expenses |
$3,416,947 |
 Guaranteed Funding |
40% |
Dave and Lynn’s guaranteed inflows during retirement are projected to be $2,238,419 from their combined Social Security income, funding 40% of their total retirement expenses.
| Total Expenses |
$5,906,126 |
| Guaranteed Income |
$3,552,568 |
| Unfunded Expenses |
$2,353,558 |
| Guaranteed Funding |
60% |
Dave and Lynn’s guaranteed inflows during retirement are projected to be $3,552,568, funding 60% of their total retirement expenses.
Breakdown from guaranteed annual income inflows starting in 2027:
Dave’s Social Security: $34,237
Lynn’s Social Security: $19,165
Guaranteed Withdrawals from their annuity: $18,565
Dave and Lynn, both age 58 in 2020, had $1 million in investible assets allocated to 38% stocks, 57% fixed income, 5% cash (historical rate of return of 5.4%). They purchased an annuity with $300,000 and allocated that to 80% stocks, 20% bonds (historical rate of return 8.63%). The annuity cost 1% more than their other investments–which were assumed to have no cost for the purpose of this analysis. Dave and Lynn also elected a living benefit that guarantees growth of the guaranteed withdrawal balance (GWB) income base at 5% while they wait to retire. Upon retirement, the living benefit provides a 4% guaranteed annual withdrawal amount. They plan to retire at 65, spend $70,000 per year in today’s dollars and enjoy a 29-year retirement. Like many financial plans, Dave and Lynn’s plan applies appropriate tax rules every year based on their tax exposure for that year, including receipt of dividends and withdrawals from qualified accounts to satisfy required minimum distributions (RMDs).
Source: eMoney, “Dave and Lynn Acosta, Acosta’s Financial Plan,” April 14, 2020.
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Dave and Lynn's case study is a hypothetical example for illustrative purposes only and is not representative of the past or future performance of any product. Past performance is no guarantee of future results.
Annuities are long-term, tax-deferred vehicles designed for retirement and are insurance contracts. Variable and registered index-linked annuities involve investment risks, value fluctuation, and possible loss of principal. Earnings are taxable as ordinary income when distributed. Individuals may be subject to a 10% additional tax for withdrawals before age 59½ unless an exception to the tax is met.
Add-on living benefits are available for an extra charge in addition to the ongoing fees and expenses of the variable annuity and may be subject to conditions and limitations. There is no guarantee that a variable annuity with an add-on living benefit will provide sufficient retirement income.
*The principal value of the variable annuity will fluctuate based on the performance of the underlying investment options and may lose value.
**Tax deferral offers no additional value if an annuity is used to fund a qualified plan, such a 401(k) or IRA, and may be found at a lower close in other investment products. It also may not be available if the annuity is owned by a legal entity such as a corporation or certain types of trusts.