In this lesson we will review a real life case study that showcases the advantages of using a laddered annuity strategy with a recovery of principal leg during retirement.

So let’s jump right in…

Case Study 1 Assumptions:

Bill & Sue Johnson, Ages 60 & 61, both in excellent health.

Total Household Traditional IRA Position: $1,000,000

Total Household Non-Qualified Position: $350,000

Total Household Roth IRA Position: $0

Current Retirement Income Sources:

His SS $3,400

Her SS $1,800

Small Pension $650

TOTAL Current Retirement Income: $5,850

TOTAL Needed Retirement Income: $10,000

Income Shortfall: $4,150

Primary Needs & Concerns:

- The Johnsons are 5 years away from retirement (at age 65) and are very concerned about safety of principal and the potential risk of taking another big loss in the stock market this close to retirement.

- Starting at age 65, they would like to generate at least another $5,000 a month of income, to supplement their pension and SS, but they are also concerned about inflation and want their income to get bigger throughout their retirement.

- They worry about taxes because they realize so much of their money is concentrated in traditional IRA's and know they will have an RMD burden down the road.

- They would like to preserve as much principal as possible to pass down to their 4 children and 8 grandchildren but worry that the estate is also going to be eaten up by taxes.

Solution: A Five-Leg Laddered Plan To Address All Their Needs

STEP ONE: We separate their overall portfolio of $1,350,000 into three primary categories or segments:

Additional Needs: $175,491.56

Assets for Income Production: $859,960.29

Assets for Recovery of Principal (growth): $314,548.15

:The Additional Needs Segment contains $100,000 of cash that we set aside purely for emergencies throughout retirement (we call this the Emergency Cash Position or ECP for short) as well as an additional $75,491.56, which is the estimated conversion tax bill needed to convert the Recovery Leg (the $314,548.15 in the last leg) into a Roth IRA (more on this in a minute).

This total amount of $175,491.56 came from their $350,000 of non-qualified after-tax money.

SECOND: the Income Assets of $859,960.29 is further divided into 3 separate annuity legs.

Annuity Leg 1 is initially funded with $687,000 of IRA principal, which receives a guaranteed annual compounding growth rate of 8% on their future income payout, thereby allowing it to begin paying a joint guaranteed lifetime income stream at age 65 of $5,257.44 (remember their goal was at least another $5,000 of monthly income)

Annuity Leg 2 is funded with $103,000 of IRA money, but it is going to receive the 8% growth rate for 10 full years until age 70. At that time, it will also turn on joint lifetime income and provide a significant inflation adjustment, by adding an additional $1,297.15 per month of income to their existing $5,257.44, thereby boosting their total lifetime annuity income to $6,554.59.

That is a 25% RAISE in their annuity income that automatically occurs at age 70, regardless of whether the stock market is performing well during that time frame or not!

Annuity Leg 3 is initially funded with $69,960.29, grows for 15 years at an 8% compounding return, and then provides $1,331.56 of monthly joint lifetime income starting at age 75. This is another 20% inflation adjustment to their overall annuity income, bringing their total monthly joint lifetime annuity income to $7,886.15 per month.

THIRD: the Recovery Leg of the plan was originally funded with $314,548.15 of traditional IRA money, that we converted to a Roth IRA initially when we first set up the plan. The purpose of the Recovery Leg is to enjoy undisturbed compound interest for a 25 year period, which, at only a humble 6% assumed rate of return, would re-grow or "recover" the original $1,350,000 of lump sump principal they started retirement with, by age 85!

However, because the Recovery Leg was funded with a Roth IRA, it has now regrown completely income tax free and RMD free, and can even be left to their heirs completely income tax free as well. This only cost them $75,000 in taxes initially in order to pass down $1,350,000 tax-free to their children and grandchildren!

Take a moment and re-read the breakdown we just described, if needed, and note how it looks visually in the proposal example below: