Covering Guaranteed Expenses

Author: Milner Financial Annuity Director, Chris Long

The primary purpose of an annuity is to generate income for either a set period or for an individual’s (or two individuals’) lifetime. There are many alternative uses for annuities and over the years they have grown to be used effectively for more than their intended purpose, but annuities are still the only financial product that can guarantee a fixed amount for the lifetime of a person. I am asked frequently from agents what the best way to use an annuity to generate income is.

There are two ways for us to solve what an annuity can provide in income for a client.
The first way (which is most requested) is to illustrate what a client’s total retirement savings would generate in income for the desired time. This will show the client what the maximum income amount is that can be generated using their retirement savings. This will simply represent the highest possible guaranteed income for an individual based on the premium they would like to use. The second method, which I have called covering guaranteed expenses, is to determine all the expenses that the client is guaranteed to not outlive: water/power bill, cable, insurance premiums, etc. Once we have added all these expenses together, we work backward to determine what lump sum the client would need to generate lifetime income to cover the agreed-upon guaranteed expenses.

Let us take a look at a quick case study to explain the advantage of covering guaranteed expenses: Jim and his wife, Lucy, have worked hard throughout both of their careers and have managed to save up $500,000 towards their retirement. Jim will be retiring this year at age 65 and they want to know how much income they could create with an annuity that would cover both their lives. Using the first method, their agent shows them an illustration that shows a joint-life $500,000 single premium immediate annuity generating $2,000 in guaranteed monthly income for both of their lives. It seems fair, but Jim and his wife are both wary of placing their entire savings into a product in which they will have no access to the lump sum. In response to this concern, the agent then decides to use the covering guaranteed expenses strategy.

After gathering all the guaranteed lifetime expenses, the agent realizes that the guaranteed income needed to cover these expenses for Jim and Lucy is $1,000 per month. This means the agent can offer them an annuity using only half of their life savings ($250,000) and cover those expenses for the remainder of the clients’ lives. The remaining money can then be used for leisure activities, investing, or use in legacy planning.

The opposition that I receive on this strategy is, “What happens if the client’s savings aren’t enough to cover the guaranteed expenses?” This is an obvious issue, but it is not an issue that is caused by the annuity itself. If the client’s life savings do not cover the expenses in which they know they will not outlive, the client should know of this reality when entering retirement, as opposed to realizing this 10, 15, or 20 years down the road. This situation is an opportunity to work with the client on which goals are most important and what options they have. Options to solve the issue could include a combination of a certain period only immediate annuity that offers an income for a set period while investing the remaining assets into a vehicle more growth-oriented that they can access once a certain period is exhausted.

Annuities are the only product for a client to use a lump sum to generate guaranteed income which they cannot outlive, and the guaranteed expense method helps the client see a structured purpose for the annuity portion of their financial portfolio. Removing annoying and persistent expenses will help a client be more at ease entering retirement, knowing that these inevitable expenses will be taken care of.

To Learn More Contact: Annuity Director, Chris Long 800.926.9206 x 132 [email protected] or

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