Income and Fixed Annuities

Immediate and deferred income annuities, fixed indexed 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 Deferred Annuities tab allows configuration of fixed deferred contracts. New purchases are configured in the Strategies tab.

 Income Annuities

Immediate Income Annuities are known by multiple names - Single Premium Immediate Annuities (SPIAs), Immediate Annuities, or Income Annuities. All 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. Some carriers have started offer 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 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.

 Fixed Indexed Annuities

Fixed Indexed Annuities are fixed annuities that credit a minimum guaranteed rate of interest over a fixed number of years, along with any additional interest that may need to be credited as well, based on the change in the rates of a broad market/stock index

 Payout Start Year: The year the annual payments will begin

 Immediate Credit Enhancement, %: Bonus to benefit base on purchasing a new FIA

 Interest Cap Rate, %: It is the upper limit on the rate of return an investor can receive. For instance, if the index return is 10% but the Interest Cap Rate is 5%, the investor will only receive 5% return.

 Guaranteed Growth, %: This is the minimum amount of return the investor will receive for the benefit base. Usually FIAs have a rider which guarantees a certain minimum level of return annually.

 Guaranteed Period, Years: This is the duration of time for which the certain guaranteed minimum rate of return is applicable for the Benefit Base, out of the total duration of the FIA.

 Lifetime Withdrawal Rate, %:  This is the annual payout an investor gets with a rider that allows the investor to get payouts for his/her entire lifetime, no matter how long he/she lives.

 Asset Classes: This is the type of assets in which the FIA is tied to for returns.

 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. A portion of the payout, determined by an exclusion ratio calculated from expected return and net cost as per IRS publications, 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.

 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.


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