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Insurance Products Should Not be a Four Letter Word When it Comes to Retirement Income Planning

The Wall Street Journal had a recent article that I think was detrimentally incomplete even taking into account that it is 1,000 words on a subject that can take years to master.  The article, “You Need a Plan to Boost Retirement Income” by Jeff D. Opdyke highlights three asset vehicles/classes that he thinks should take retirees through retirement,

The proper mix of stocks and bonds and cash is the mix that allows you and your parents to sleep at night. That may sound trite, but it is the only true gauge that works. Mom and Dad can look at all the charts and all the probabilities, but if at the end of the day the mix of assets has them paranoid that a market correction will wipe them out or leave them unable to afford their cost of living, then it is clearly the wrong mix. Thus, telling you what an appropriate mix might be for your parent is largely impossible. But there are a couple of generalities and rules of thumb around which you should begin helping your parent structure a nest egg.

Mr. Opdyke briefly goes into:

  • Stocks – Domestic/Foreign/Blue Chips/Dividend payers
  • Bonds – Broad based/Munis
  • Cash – CD Ladder

While reading the short article all I could think of is how could he miss a very important competent to a Retiree’s income?

Insurance Products Usually Have a Place in Retirement Income Planning

I am not providing specific financial advice for anyone, but I truly believe that insurance products (we’ll discuss a few kinds in a bit) can fit into retirement income planning.  There are a couple general types of “insurance products” that could be used for retirement income planning.  Each product could have an entire blog dedicated to the different types of variations, however, this post’s purpose is just to get you to think outside the box.

Single Premium Immediate Annuity

At its most basic form an annuity is nothing more than,

a specified income payable at stated intervals for a fixed or a contingent period, often for the recipient’s life, in consideration of a stipulated premium paid either in prior installment payments or in a single payment.

As such, the easiest type of annuity to understand is the Single Premium Immediate Annuity.  In the simplest form you give an insurance company a lump sum and then they return a monthly, quarterly or yearly check for the rest of your life.  If you ever researched or listened to an annuity pitch you know there are variations:

  • If you want to protect your Spouse you can do Joint Lives
  • If you want to protect against the fact that you may die in year 2 you can guarantee a beneficiary will receive a payout for either 5 or 10 years from the contract date
  • If you want to protect against inflation you can add a COLA rider

The variations can go on, but the most important thing to remember when it comes to SPIAs is that

  1. One is shifting the risk of a market downturn to an insurance company which seems to be important to retirees
  2. One is receiving a steady and reliable “paycheck” which is part principal (non-taxable) and part interest (taxable)

Deferred Annuities

The topic of Deferred Annuities can get very complicated very fast but like my inspiration for this post, Mr. Opdyke, I will keep it as simple as possible.  Before I dot hat for this topic a thought; anytime someone brings up the topic of annuities I hear about “the fees” but remember we are shifting the risk to an insurance company and you have to pay for that type of protection.  Maybe that is something you are into, maybe it is not, but please if you take nothing away from this post take this away deferred annuities are just a tool they are not inherently evil.

There are two types of Deferred Annuities:

  1. Fixed
  2. Variable

As the name implies  a fixed annuities have a fixed growth rate associated with them.  I like to think of them as mega-CDs, where the interest is usually higher and the gains are tax deferred but to get those benefits you usually have harsh penalties associated with trying to roll out of the vehicle before an aforementioned surrender period (usually between 5 and 9 years).

Likewise, a variable annuity has a portion that is invested in the market, however, promises are often provided by the insurance company that say if the market hits the fan we will still provide you with “X.”  Variable Annuities are often attacked by personal finance bloggers due to their fees…but what are you getting with those fees? Here are some common riders:

  • Guaranteed Minimum Income Benefit – As Defined by Investopedia: Receiving a guaranteed minimum income benefit ensures that an annuitant will receive a payment regardless of market conditions. This minimum payment amount is predetermined by assessing the future value of the initial investment. This option is only beneficial to annuitants who plan to annuitize their annuity.
  • Guaranteed Minimum Accumulation Benefit – As Defined by Investopedia : A rider on a variable annuity, which guarantees the minimum amount received by the annuitant after the accumulation period, or a set period of time, is either the amount invested or is locked in gain. This protects the value of the annuity and the annuitant from market fluctuations.
  • Guaranteed Minimum Withdrawal Benefit – As Defined by Investopedia: This specific option gives annuitants the ability to protect their retirement investments against downside market risk by allowing the annuitant the right to withdraw a maximum percentage of their entire investment each year until the initial investment amount has been recouped.

GMIBs aren’t as common as they once were because of how good of a deal they turned out to be for the consumer.  There were 150 year old AAA rated insurance companies providing 5% GMIBs so that says you put 100K but it is only worth 50K, however, you decided to turn on the income stream – you would get the income stream based on the 100K pot growing at 5%!  All fun and games for the insurance company until the market has a couple negative years.

Again, if you tried to “roll out” you would have only gotten that 50K value not the $100K+growth value.  That “fake” growth is only for the income stream purpose.  Re-read this paragraph it was the source of a many of lawsuits against advisors!

Cash Value Life Insurance

Another unpopular choice, but one that should have been covered by Mr. Opdyke.  For purposes of this post I will ignore whether one should buy Whole or Universal Life insurance (if you want to read where I fall on that check out the category: Life Insurance).  Rather we are going to briefly focus on those who already own a Variable Universal Life Insurance Policy, Whole Life Insurance Policy, Guaranteed Universal Life Insurance Policy or one of the myriad of in-betweens.

These policies have cash, that is what they are built around.  The cash in the policy is yours to be used how you like.  It can usually be turned into an income stream right within the product using a technique that surrenders cash until you reach basis then instead of taking from gains you actually borrow from the policy.  I can’t stress enough that CARE SHOULD BE TAKEN IF ONE IS TO PARTICIPATE IN THIS TYPE OF DISBURSEMENT STRATEGY.  Alternatively you can take your cash value that was growing tax deferred and preform a 1035 Exchange from a life insurance policy to an annuity.

Retirement Income Planning Conclusion

I think Mr. Opdyke did a great job highlighting the asset classes he did look into, however, there are a lot of retirees with other options and I just figured this could be an add on to that article.



  1. Very thorough article, I enjoyed learning a bit about the deferred annuities.

    Seeing that I plan to retire very early, I don’t think it will be a part of my income stream. This is because i don’t need the risk aversion since I will still have income potential (If I need to go back to work). But for those that are 60+, this is a good diversification.

    • If you are trying to retire early then most of the products I brought up aren’t really worth your time.

  2. This is a great overview, and I tend to agree that insurance products have a role to play in a balanced retirement plan. I like immediate annuities, and plan on securing one for a portion of my retirement income stream. The main drawback is that the more bells & whistles you add, the more expensive they are. Since we’re probably going to live for 40 years in retirement the indexing option is essential.

    • Immediate Annuities are exciting products. I think they are fantastic – especially if you can pair it up with a life insurance product to replace the principal used.

      • Unfortunately, not much at the moment. Still focused on getting out of debt. I’ve got 2 income streams, blog and my 9-5 job, but looking at adding more in the future (do kids count as an income stream? They are free labor after a few year investment)

  3. I still have much to learn about retirement planning. I like that you break things down for people who aren’t real familiar with the topic.

  4. I have not spent any time on retirement planning (I stopped at the stage of looking into how much we need for retirement). Great breakdown for those of us who don’t understand these things.

  5. My 401K took a hit the past 2 years. I talked to several financial investors. Tried a few strategies but finally found one that worked for me. Right now I am into annuities and got a strategy from my planners. So anyone interested in a sound retirement plan should definitely check with your financial planner. Good luck!


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