Guaranteed Lifetime Income: Locking in High Interest Rates for Life

Guaranteed Lifetime Income Products provide you a guaranteed income stream for the rest of your life and allow you to lock-in today’s high interest rates for the rest of your life

What is a Guaranteed Lifetime Income Product?

A guaranteed lifetime income product allows you to invest an amount today and get a guaranteed stream of income in the future for the rest of your life.

Who is a Good Fit for a Guaranteed Lifetime Income Product?

Guaranteed Lifetime Income Products are the best fit for clients in their 50s looking to retire in their 60s who want to provide a guaranteed stream of income that will last for the rest of their life.

These clients are in relatively good health and want to increase their retirement income because they expect to live a long time.

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Why is Guaranteed Lifetime Income a Necessary Part of a Retirement Plan?

With the increased use of 401ks and IRAs, companies are no longer providing their employees with pension plans that provide guaranteed income. This means that even though clients may be saving for retirement, they are exposed to full market and interest rate risk.

This means that even though clients have been saving diligently, a large market crash could put their entire retirement savings in jeopardy.

Guaranteed lifetime income creates a tax-efficient guaranteed stream of income that can help protect clients against a downturn in the market and the risk of running out of money in retirement.

Currently clients can get payout rates as high as 10%-15% of their initial investment.

Why is a Guaranteed Lifetime Income Product Better Than Investing in Bonds?

Typically clients near retirement will start investing in bonds to help protect against market crashes.

However bonds have a lot of downsides:

1. They are low-yielding: In exchange for taking less risk than stocks, bonds have notably lower expected returns.

2. They are highly taxable: In addition to being low-yielding, bonds are also highly taxable. If you live in states with high income taxes like California and New York, you could be losing 40%-50% of all of your gains in bonds to taxes.

3. They can lose money: Bonds don’t protect clients against losses. In fact, bonds can lose money just like stocks can. In 2022 bonds and stocks both experienced large losses.

4. They don’t protect against living too long and running out of money: Since bonds are low-yielding and highly taxable, if you invest too heavily in bonds you risk running out of money if you live too long.

 

Guaranteed lifetime income products provide the following benefits that bonds don’t provide:

1.  They are higher-yielding
Guaranteed lifetime income products provide significantly higher yields than bonds. This provides more income for retirees.

2. They are tax-efficient:
Guaranteed lifetime income products are very tax-efficient and clients using these products will pay significantly lower tax-rates on the income than they would if they were invested in bonds.

3. Guaranteed lifetime income products can guarantee the client doesn’t lose money:
Guaranteed lifetime income products can provide two guarantees that bonds can’t provide. The first is a guaranteed stream of income for the rest of the client’s life. And the second is a guarantee that clients will never lose money by investing in them.

4. Guaranteed lifetime income products allow clients to take more risk in other areas of their investment portfolio:
Since guaranteed lifetime income products provide a guaranteed stream of income, clients are able to take more risk in other parts of their portfolio because they know they have a guaranteed income stream to provide a safety net. This allows them the ability to grow their portfolio and earn more money for the later years of their retirement than they would be able to do if they were just investing in bonds without guarantees.

Case Study: Saving for Retirement:

John and Sally are both 55 and saving for retirement. They want to invest $100,000 today and be guaranteed a stream of income every year for the rest of their life starting when they retire at age 65.

By investing today when interest rates are high, John and Sally can lock in a $13,000 annual payment every year for the rest of their life starting when they reach age 65.

That’s a 13% payout rate on their investment guaranteed for the rest of their life.

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What are the Risks of Guaranteed Lifetime Income Products?

The main risks of guaranteed lifetime income products are that the risks and benefits can vary greatly from product to product.

Some offer very low payout rates and others offer very high payout rates.

Some offer no ability to exit the investment early and others have great liquidity provisions and also guarantee against a loss.

That’s why it’s important to work with a partner who can work to find a product that maximizes the benefits you receive from the product.

To learn more about how you can work with Colva to help you acquire a guaranteed lifetime income product that maximizes the return you get, contact us here.