Filed Under:Annuities, Variable

Income Buckets

As a child, I’d visit my grandparents’ dairy farm and help out with the chores. I used to feed the pigs with a squeaky-handled bucket. I’d take the filter out of the dented milk bucket to let the kittens lick the milk off of it. I would use a large aluminum bucket to feed the chickens and cows. A farm couldn’t operate very well without a diverse collection of buckets.

These days, there is a lot of talk about using income buckets to generate paychecks for life. During my weekly calling time, when I reach out to friends who are not yet my clients, I contacted a former CFO. While talking with him, I discovered he was getting proposals from big city private wealth management boutiques and international wirehouses for his IRA decisions. This person not only had $1 million in his IRA, but also another $3 million stashed away in various banks and brokerage accounts. He asked me, “What do you think about income buckets?” I responded, “Well, what do you mean by ‘income buckets’ anyway?”

He went on to explain that he wanted to invest $3 million equally into three buckets. Bucket #1 should be designed to provide income for retirement years 1-7, Bucket #2 will support their income retirement needs for years 8-14 and Bucket #3 will cover years 15-21.

I told him I believed the concept had merit and would serve a moderate investor well over the years. I worked hard with Josh from our office to design three options for each of the three income buckets. I’ve always been comfortable offering a menu of options to prospective clients. Using groups of three eliminates a yes-or-no decision and leads the client to decide what option he likes best.

We prepared two PowerPoint slideshows and nine illustrations to correspond with the three options for each of the income buckets. The core of the PowerPoint presentation was the three slides shown.

 

My CFO friend and his spouse chose the SPIA for Bucket #1. It paid just under 2% with an approximate 94% tax-free income of $145,000 a year. Bucket #2 and Bucket #3 drew the CFO’s attention to a variable annuity with an income rider. He asked, “Why hasn’t anyone else talked about this during their presentations?” You see, we were the last wealth advisor to talk to them. They had heard lots of pitches for various investments but nothing that provided this type of security. His wife wanted security and believed the bank could provide the income they needed without having a care in the world. My friend didn’t want to have to answer to his wife if the market tanked yet once again.

We have found that the VA guaranteed income riders are very popular with our clients. One prominent product boasted guaranteed 200% growth in the Guaranteed Withdrawal Base (GWB) over 10 years. The interest rate paid on the GWB is 6% or the highest annual growth rate of the actual account value, whichever is greater.¹

The CFO and his spouse realized that a 6% guaranteed income stream was very attractive in today’s marketplace. They wanted additional security in this uncertain world. They also hoped for a hedge against inflation that might be achieved through the equity exposure of the separate accounts. Overall, they are leaning toward the SPIA for years 1 to 7 or maybe even 1 through 10. After that, they could decide to begin the 6% income withdrawal from the GWB that is guaranteed to double in 10 years. If they deposit $1 million into the VA with a guaranteed income rider, then, according to the product’s brochure, the GWB should grow to $2 million in 10 years. At age 75, this client might receive 6% times $2 million, or $120,000 a year of income. If the clients invested $2 million into the VAs with income riders, it may end up doubling to $4 million. At a 6% income stream, they may be able to receive approximately $240,000 a year of income.

Clients are becoming more interested in these income riders than ever before. It’s a way the average investment advisor representative or registered representative can create a hedge against market loss and yet capture the potential 6% income guarantee for life.

 

1. Past performance is no guarantee of future results. This is not to be considered typical and investments shouldn’t be made without first reading a prospectus. Please hire a registered representative or registered investment advisor representative to help you before investing any money.

 

 

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