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The Numbers Don't Lie

When waxing poetic about the positive attributes of annuities with guaranteed lifetime withdrawal benefits, too often we are fixated on the quality of the cashflow when using those benefits. Meaning, perhaps we are paying too much attention to the fact that the income is guaranteed for a life or lives, and less focused on the quantity of that income.


But the fact is, both are important. The guaranteed nature allows annuity owners to plan future income with a degree of precision and efficiency uncommon with nonguaranteed approaches. But the quantity or the scale of that income is often underappreciated, specifically when measured in the context of more traditional measures. In comparison, the scale of income is impressive.


While the 4% safe withdrawal approach developed by Bill Bengen in 1994, and its more recent derivatives (less and more than 4%, depending on which articles you've read) are not considered state of the art in professional income planning circles today, they remain a recognized benchmark for many.


Knowing this, and using the 4% approach as a benchmark for comparison, we can then determine at what compound annualized growth rate, over what period of time, a portfolio of growth assets will need to accumulate such that an INITIAL annual withdrawal from a portfolio (equal to 4% of that portfolios value) will MATCH the annual guaranteed cashflow from an annuity with a GLWB feature.


To that end, Rafferty Annuity Framing has developed the following table. While no substitute for a thorough evaluation of products and methods, it does provide an At A Glance understanding of this comparative relationship. Further, given muted expectations for capital markets returns going forward, it should be a useful evaluation tool for determining the utility of an annuity with a GLWB in a client portfolio for clients within a decade of retirement, particularly those without pensions waiting.


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