Guaranteed Income Annuity: What Comprises Your Income Floor?

Hi there, I'm Stan The Annuity Man, America's annuity agent, licensed in all 50 states, that's including the one you're sitting in. Today, we're talking about guaranteed income annuities. What comprises that guaranteed income floor? Let's talk about it.

Income Floor

Let's start with the income floor. What is the income floor? I always use that. Everybody needs an income floor. It's not like a floor, but it's a foundation of income that's coming into your bank account every month, regardless of who's in office, what happened in the world, or whatever virus has happened. Regardless, it's that pension-type income stream that everybody eventually wants. Some of us want it earlier than most. There are 10,000 baby boomers retiring every single day or reaching that retirement age every single day, and all of the people who call us are looking for income.

So, the income floor could be Social Security. By the way, that's an annuity. You don't believe me? If you're a United States citizen and you've paid into Social Security, you own an annuity. It's your Social Security payments, it pays for life. What do annuities do? They pay for life. So, Social Security is part of that income floor. Also, if you're a government or union worker or you just have one of the less than 10% of the private companies that offer pensions, remember those? You got the gold watch, and then you got the pension payment. If you're one of those people, and you're fortunate, that's part of your income floor as well.

Great story. My parents were college coaches, and I put myself through school playing basketball. I am 6'6". I used to be 7'2" with the hair, but my wife made me cut this big mop of hair off. But anyway, my parents then transitioned to middle school teachers, and they did that for the rest of their careers. And when they retired from the North Carolina State teacher system, they got a pension, and my dad, bless his heart and passed away a couple of years ago, he'd always talk, poor mouth, "We don't have any money, and we didn't save a lot of money." And I'm like, "Dad, you got this pension and it's probably worth $1,200,000 or $1,300,000," based upon where you're getting paid, based upon your life expectancy because that's how they pay it, but that was part of their income floor. That was a main part of their income floor in conjunction with Social Security, or as they say in the south, "Soc Security," we don't finish anything. "Soc Security."

Anyway, you can also have dividend stocks and rental income as part of that income floor. Whatever's coming in every single month is part of your income floor. The problem with where we're at now in society and workplaces is that companies have gone away from pensions. As I said, less than 10% of private companies even offer them anymore. What they have is a 401(k)-type plan. You probably have that where you are working. What is that? That's for growing your assets. It's called a defined contribution plan, but when you decide not to work anymore and retire, hopefully, you're going to have to take those assets and convert them into part of your income floor, into a life expectancy lifetime income annuity.

Creating an Income Floor

How do you create that income floor? Well, there's a couple of ways. First of all, you need to decide when you want the income to start. That will determine the type of annuity we will quote using our proprietary annuity calculators that quote every carrier on the planet, as far as I know. If we're not quoting it, you better contact us because I'm Stan The Annuity Man. I'm America's annuity agent, the number one agent in the country. And what we do is we run those numbers through our calculators to spit out the highest contractual guaranteed income for you. So, you need to tell us when you want that income to start.

There are a couple of ways to do guaranteed income annuity-type structuring. You can say, "Hey, we have this lump sum, or I have this lump sum of money, and here it is, and here's when the income's going to start, and it's going to be either on my life or joint life with my spouse or partner. Tell us at The Annuity Man, how much income that will create?"

Now, we're going to ask you a couple more questions about whether it's life only or joint life only or if you want to put in a structure within the policy so that 100% of any unused money goes to the beneficiaries. We'll have to go through some structuring choices. Obviously, I'm going to need a date of birth or dates of birth if it's joint.

The other way to do it, which I love, and no one really pushes this, and I wonder why. It's the right thing to do, but it might create a lesser commission for the agent. All annuity commissions are built-in; you never see them, but obviously, the more money you put in, the more commission, right? So, I tell people instead of saying, "Okay, here's the lump sum," why not look at your income floor and tell me what gap needs to be filled, whether it's $2,500 a month or $3,000 a month?"

What you do is reverse engineer the quote. In other words, we put in the quote parameters, dates of birth, when the income's going to start, and then that monthly income that's desired, and then the carrier's bid on it, and then we choose the carrier that says, "For this amount of money, the least amount of money, we can guarantee that number." Obviously, we do the Claims Paying Ability and look at their ratings, Comdex Scores, and things like that. If you can take two things away from this, you can do it in a lump sum or a specific monthly amount and solve for that.

Inflation

Let's talk about inflation. That's the gorilla in the room. People are like, "Well, what happens when inflation hits, Stan The Annuity Man?" There are no good answers to that, just bad sales pitches. There's no perfect answer, perfect product, or perfect strategy. Even though most agents will tell you they have it, they do not.

When you can attach increases to annuity payments, they're called Cost of Living Adjustments, COLAs. You can put a COLA on the payment. Contractually, you can say, "Hey, I want it to increase by 1% every year, or 2% every year, or 3%." It's your choice but understand that annuity companies have the big buildings for a reason. They don't give anything away. So, anytime you attach an increase to the income stream, the annuity company will lower the payment. The companies lower the payment to make up for that increase, and you go, "Well, that's rotten." No, it's called business. It's called pricing it so that it's still based on your life expectancy, but they're going to lower that initial payment.

By the way, if you didn't know this already, you already own the best inflation annuity on the planet. "What's that, Stan The Annuity Man?" It's called Social Security. Politicians raise that payment just on their political whim. There are no actuaries looking at that. So, you already own the best one, but there's no perfect answer for inflation. If we go back to the example of putting a lump sum in or putting or solving for a monthly amount, if inflation does hit in the future, then we can address it at that time.

Too Much Money

In my opinion, at that time, you go back in, and you might have another monthly income gap because of the inflation, and we do a reverse-engineered quote to solve for that inflation amount, and you can use as little money as humanly possible. One of the biggest mistakes I see in the annuity world is that people put too much money into annuities. The annuity industry doesn't like that either. They have rules in place where they don't want you to put all your money in, and they will actually spit the applications back and say, "Hey, this is too much allocated to annuities." Thank goodness for that. The only way around that is if agents, and I hope they don't do this, but we see this sometimes, they fictitiously fill in the application. So, always ask for a copy of that application. But hang in there with me. I have one more thing I have to tell you.

I have written six owner's manuals on all types of annuities. You can download them for free because you need to understand what you're buying. You need to do your homework. Do not believe the sales pitch. Do not believe what anyone tells you it's going to do. Read the contract, read my books, go to The Annuity Man, read my articles, read my blogs, and listen to my podcasts.

With that being said, I'll see you on the next Stan The Annuity Man blog.

Never forget to live in reality, not the dream, with annuities and contractual guarantees! You can use our calculators, get all six of my books for free, and most importantly book a call with me so we can discuss what works best for your specific situation.