Using Income and Fixed Annuities

Last update on November 6, 2013

Immediate and deferred income annuities and fixed deferred annuities can be modeled within the Income Discovery tool. The Income Annuities tab allows you to configure the details of the immediate and deferred income annuity contract, while the Fixed tab allows configuration of fixed deferred contracts.

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Immediate Income Annuities
Immediate Income Annuities are known by multiple names - Single Premium Immediate Annuities (SPIAs), Immediate Annuities, or Income Annuities. All of them involve purchasing the contract by paying a one-time premium and then receiving monthly payouts for the life of the annuitant.

Before the advisor can start analyzing plans using an annuity, they first must configure them in the Income Annuities tab. Each annuity is given a unique name, so that it can be chosen within the plan analysis pop-up window. The monthly payout is configured as a standard quote for a premium of $100,000. For fixed payouts, an inflation adjustment of zero is selected. Cost-of-living-adjustments on the contract are configured by selecting that value in the inflation adjustment field. Recently, a few carriers have started offering payouts that adjust in proportion to the actual inflation measured by the Consumer Price Index - Urban (CPI-U) inflation index published by the US Bureau of Labor Statistics. Such contracts are configured by choosing CPI-U in the inflation adjustment field.

Immediate annuities start their payout at the beginning of the plan, so set the "Payout Start Year" to the "Plan Start Year" located within the Income Parameters tab.

Deferred Income Annuities
Deferred Income Annuities are similar to immediate annuities as the premium or purchase price is paid up front and the contract pays a lifetime cash flow, but the difference is in the start date of the payout. Payouts of deferred income annuities begin in future, which is configured by setting the Payout Start Year. The remaining fields are configured similarly to immediate annuities.

Fixed Deferred Annuities
Fixed deferred annuities are a mix of certificate of deposit that earns a rate of return, which is how they behave during the growth phase, and an income annuity with lifetime payout post annuitization. During the growth phase, the annuity earns a fixed rate of return and the annuity balance grows. Many contracts also allow the owner to withdraw from the annuity before the balance has been annuitized, provided the owner reaches a specific age and has been invested in the annuity for specific number of years. The owner can annuitize the balance in the annuity into a life-stream of payouts. The payout rate configured within the tool is the rate on the date of annuitization, based on the age of the annuitant on that date.

Purchase Amount
In the non-tax mode of the application, the purchase amount is configured as a percentage of the total retirement assets, but not at the time of configuring the annuity. The user selects the portion of retirement assets to be used for the annuity purchase when analyzing an income plan, either as a custom plan run or optimization run. The amount of assets available for use in a Systematic Withdrawal Portfolio (SWP) is reduced by the purchase price paid.

Linked Life and Survivor Benefit: While planning for a couple, based on their individual lifespans (see related article on Lifespan Based Planning), the annuity payouts can be associated with the life of one of the spouses or joint life. For joint life, survivor benefit (payout for the survivor as a percent of the payout when both were alive) is also configured.

Tax Mode

Taxable Portion of Annuity Payout
The tax mode of the tool calculates the portion of annuity payout that is taxable and adds that to taxable income. For the annuity purchased with after-tax assets from a taxable account, the taxable portion of the payout is determined from the Exclusion Ratio supplied by the insurance firm that is also configured in the tool. The portion of the payout determined by the exclusion ratio is considered a return of the principal and not taxable. The same nominal dollar value of each future payment, until the full principal is paid back, is tracked as non-taxable. The balance of the payout is considered taxable. Similar logic is used to determine the portion of the payout from an annuity bought in a tax deferred account where post-tax basis attributed to the purchase is returned free of taxes. Details are provided in the methodology document.

Fixed Deferred Annuity
Even if the annuity is purchased in a taxable account with after-tax money, the interest credited is not taxable when received. The annuity balance grows free of taxes, until annuitized. On annuitization, the original purchase amount, not the annuity balance on annuitization, is tracked as coming free of taxes over the lifespan of the annuitant – the Exclusion Ratio is used to determine the portion of taxable payout as described above.

Purchase Amount and Purchase Account
Unlike the non-tax mode, in the tax mode of the application, the user enters the purchase amount and the account from which the money will be withdrawn to purchase the annuity. If the purchase is made from a taxable account, it may involve sale of existing holdings that can result in capital gain or loss. For purchases made from a tax deferred account, a proportional post-tax basis is transferred to the annuity and then tracked to determine the taxable portion of the annuity payout.

Live Annuity Quotes
To use the live annuity quote feature, you must first create a row for an immediate annuity. Since while creating the row you don't yet know the payout rate, you can enter an arbitrary amount of the monthly payout. After the row has been successfully created, you can click on the AnnuityQuoteRefresh.png  icon to obtain a live annuity. After the quote is successfully obtained, the new payout is automatically updated in the Income Annuities tab.

Live annuity quotes for immediate annuities are provided by Income Solutions®. Income Solutions® is an annuity purchase program of Hueler Investment Services, Inc. The quotes are provided based on household data and other required attributes of the annuity quote requested by the user. The annuity quote that provides the maximum monthly benefit for a $100,000 premium is returned by Income Solutions®. The annuity quote assumes the use of qualified money for the purchase - meaning it is consistent with all calculations excluding taxes. The annuity quote provided is an approximate quote to aid the income strategy analysis process and is of a time-sensitive nature that can change at any time. It is not a substitute for an annuity illustration that needs to be obtained separately and shared with the investor. The quotes are only for use within the Income Discovery platform or for evaluating purchases of annuities through Income Solutions® and shall be used for no other purpose whatsoever.

An "*" is inserted by the application before the annuity name, if the quote from that annuity was obtained from Income Solutions®. This auto inserted "*" can't be deleted. Income Solutions ® is a registered trademark of Hueler Investment Services, Inc. U.S. Patent 7,653,560.

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