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Retirement Cash Flow from Annuities

Stan Haithcock
May 30, 2022
Retirement Cash Flow from Annuities

Today we're talking about retirement cash flow from annuities. Now, you're already participating in a part of the category of retirement cash flow from annuities because all of you have Social Security. If you have your Social Security number, you have Social Security. That's an annuity. That's retirement cash flow from annuities. If you have a pension, retirement cash flow from annuities is also considered retirement cash flow. Still, we’re going to dig deeper and go into specific annuity types and how they can add to your income floor for retirement cash flow from annuities. See the correlation?

The 4% Rule

Let's talk about the 4% rule. When I was a young buck at Dean Witter and PaineWebber and Morgan Stanley and UBS, we were just pounded into oblivion by management that, "You don't even notice. You just take out 4% from your portfolio, and you never touch your portfolio." "And then everything's good. You just manage the money, and we can charge a fee." Great. The 4% rule has been around for so long; it's archaic and works great in a raging bull market. It works great when everything just goes up with no volatility.

I've been around the block three decades, so I've seen markets go up and down. So I'm not saying the 4% rule is horrific. Still, the annuity portion of your lifetime income floor should be there in addition to Social Security.

History of Annuities

So let's talk about the history of annuities. It started back in the Roman times when the dutiful Roman soldiers and their families were laying it on the line for the Empire and were given a lifetime income stream. So that's where it all started and has been in this country, in the United States, for hundreds and hundreds and hundreds of years as a lifetime income payment. That's the history of annuities.

Now, there are many types of annuities. You can’t hate Social Security and hate annuities because Social Security is an annuity. You can’t hate your pension because that's an annuity. Not all annuities are for lifetime income, but the majority are. So let's get into the details of retirement cash flow using annuities.

In my opinion, there are only two ways to look at it. There are annuities that you can peel off interest and annuities that provide lifetime income. And yes, those are two different types. So the ones that peel off interest, think about, you bought CDs, or you have bonds, and you're just peeling off the coupon, and you're not touching the principle. With annuities, there are a couple of types. There's a CD type. It's not a CD annuity. It's a CD type, Multi-Year Guarantee Annuities, where it pays a specific interest rate. A lot of them, most of them, will allow you just to peel off that interest. That's an interest-type income. Index annuities are also CD type annuities, not a CD but a CD type. It creates and historically has produced CD-type returns; the same thing; you could just take the interest out and not touch the principle.

Those are interest income type annuities, but the majority of annuities, and the annuities that were put on the planet in the Roman times, and the annuity category is the only category that can provide a lifetime income as long as you are breathing, those four types are Single Premium Immediate Annuities, Deferred Income Annuities, Qualified Longevity Annuity Contracts, and then income riders that can be attached to, say, a deferred product like a Fixed Index Annuity. Those four provide a lifetime income stream regardless of how long you live. You can set it up, your life, joint life. Depending on the product, you can use it in IRAs, non-IRAs, and Roth IRAs. That's why you need to go to and set a time with me so that we can talk, and I can learn about your situation and then connect you and point you and quote the best products that provide the highest contractual guarantee.

Lifetime Income

With interest products, we're going back to the Multi-Year Guarantee Annuities and the index annuities; you’re not touching the principle; you’re just peeling off the interest. That's an easy calculation. But when we get to the lifetime income products, people always say, "Well, what's the return on investment, Stan, The Annuity Man®? I could do better just investing in the market." Of course, you can. That's an apple and orange comparison. Lifetime income is a transfer of risk to that annuity company to pay you for the rest of your life. You either see a benefit in that, or you do not. I think that's beneficial because we live in a pension-less world; less than 10% of private companies offer pensions. The only way to get a pension is to work for the government or a very good labor union, and even those are messed with.

When you have the 401k or savings in IRA, you will have to convert that into a lifetime income stream to solve for that income floor. What's the income floor? That monthly amount hits your bank account, regardless of markets or geopolitics—the income floor, Social Security, dividend income, pension income, and then lifetime income annuities.


So let's talk about taxation of this income coming from annuities, whether interest income or lifetime income. First of all, disclaimer, I'm not a tax lawyer. I'm not a CPA. So if you want tax answers, please go to a CPA or tax lawyer. So I'm going to give you the 30,000-foot view. When you're taking interest out of a Multi-Year Guarantee Annuity or an index annuity, it's coming out last in, first out, gains first. That's what that means, and you're going to be taxed at ordinary income levels.

Now, suppose you're taking income from a lifetime income stream product, like a QLAC or Deferred Income Annuity or immediate annuity or an income rider inside an IRA. If you're using IRA assets, then that's going to be taxed just like any asset in an IRA, ordinary income levels. If you're using a Roth IRA for an immediate annuity, a Deferred Income Annuity, or a tax-free income rider, right? Because you've already paid the taxes. If it's a non-IRA account and you're using it, you can't use a QLAC because QLACs can only be used in traditional IRAs and 401ks. But let's just say you have a non-IRA account with Single Premium Immediate Annuities and Deferred Income Annuities. Those are annuitization products. That is what's called the business exclusion ratio.

All lifetime income is a combination of the return of principal plus interest. So in a non-IRA account, if you're getting your money, your income stream, part of that's a principle, which is not taxable, and then the interesting part is taxable. That's called the exclusion ratio. In a non-IRA account, you're getting lifetime income; that principle part is not taxable.

So on the taxation part, when you do your taxes, go to the CPA and the tax lawyer. Still, I can help you with the general questions of taxation, whether you're getting interested taken off of an annuity, or you have checked the box and ripped the knob off the faucet for a lifetime income. So retirement cash flow from annuities, one thing you have to understand is it's customizable to your specific situation.

Never forget to live in reality, not the dream®, with annuities and contractual guarantees! You can use our calculators, get all six of my books for free, and most importantly book a call with me so we can discuss what works best for your specific situation.

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