Topic 5 – Income Allocation Hypothetical Example

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So now we go back to prior to 1999 at little sister Jill’s age 50. And she’s starting to plan for her retirement income now, instead of when she retires. And what she does is she earmarks half of her million dollars to go into an annuity product. This is a hypothetical example, we’ll walk through how little sister Jill could have invested using income allocation strategies. So we allocate $500,000 for income in a deferred annuity. Meaning we’re not going to take income for 10 years, in this example, when little sister Jill turns age 60. Her income begins, and then we have the growth and surplus account of the additional 500,000 allocated into the market. In this hypothetical example, the amount allocated for income generates $40,000 or 4%, remember that’s what we took out of the portfolio for big brother, Bill and little sister Jill. And we continue that $40,000 withdrawn out for life, and also have a longevity guarantee by an insurance company that will provide us this income for as long as we live.

Even if the pool of money runs out, because we see Jill’s income account value allocated for income at age 70 is down to $60,000. In a normal investment. That would mean that she only has one more $40,000 investment amount that she can take out for income. But the annuity gives a guaranteed lifetime payment. We don’t have to worry about income anymore on this money because it’ll last as long as we do. We see the total income generated through the years for little sister Jill, and then we see her growth surplus bucket that starts out with $500,000 increased over the years with no withdrawals, so that now at age 90, she has an additional $2,160,000. And this is based on a 5% growth rate with no withdrawals. Now we have to pay close attention here and see that this amount allocated for income assumed zero growth. We would want to try and find an income payment that does have growth built into it to offset our inflation needs.

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