Optimize Cash Flow in Retirement with this FIA Combination

Finding a steady, solid cash flow in retirement can be rather difficult in today’s climate. According to a recent Kiplinger article, the typical places to find higher cash flow include junk bonds, bank and utility stocks, publicly traded REITs and fixed indexed annuities (FIAs). With the exception of FIAs, these all involve very high short-term risk to principal, for two main reasons: they all trade o the open markets and are subject to short-term investor sentiment and the “fear and greed” cycles associated with markets.

Fixed indexed annuities are designed to pay you a monthly check for life, no matter how long you live. Payments begin at a date determined at the time the contract is signed. For example, a 60 year old man can purchase a FIA for $100,000 and start collecting payments a year later with a guarantee of $4,800 per year. Most are designed with no downside in a bad stock market, and you collect payments for the rest of your life, even if your account balance reaches zero. Also, unlike a traditional pension, if you pass away prematurely, your heirs will collect any remaining accumulation value. The biggest criticism with this retirement product is that most of the 4.8% cash flow that you collect is return of principal, not earnings, making it a self-liquidating asset.

Instead of solely relying on your FIA for income, you can increase your cash flow by combining it with a public, non-traded REIT. With an FIA designed for maximum growth, the combination might pull at least 6% per year in cash flow while increasing the underlying value of your original investment. If the 60-year-old mentioned previously placed some of his investment into a public, non-traded real estate investment trust, a monthly cash flow of 4% is possible. When considering this option, it’s necessary to assume inflation will cause appreciation opportunities. For the sake of this analysis, 2.5% was assumed.

The rest of the investment of the fictitious client could be placed in an FIA that offers a participation rate on the gains in the S&P 500 annually, without any losses. This type of product thrives in volatile markets, such as the one we’re experiencing. By taking the free withdrawal allowance in the product, an overall 6% projected cash flow could be disbursed. According to the article, this annuity would run out after 14 years, a time period that allows the REIT investment time to appreciate more than enough to be worth over the original total investment.

There are several inherent risks to consider when combining a REIT with a fixed indexed annuity to create growth, cash flow and security. Both are relatively illiquid investments. Real estate is always at risk of suffering unforeseen market trends, over-leverage and poor exit strategies. Also, fees for non-traded REITs can be high, as much as 15% per share price when you include sales fees. Annuities must be vetted for insurance company and interest crediting risks too. FIAs that include a lifetime cash flow do not share these risks, making it imperative for investors to underst and what it is they’re buying.

On the other hand, for those who like real estate and the safety of FIAs, this strategy can produce more cash flow and legacy assets than the typical fixed indexed annuity designed for lifetime cash flow.

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