Retirement account

[rpierleoni]

has anyone used prudential retirement account with a guanteed 5% income.

[BarryRX]

I haven't, but I'm guessing it's an annuity.

[jmvalcq]

You are right that it is annuity. However, unlike other income annuities you still have access to your money. The funds put into the account have two sides to it, an income side and a cash value side. The income side, called the protected withdrawal value, can grow by 5% or the market performace. You receive 5% of protected withdrawl value when you start taking your income. Once you turn on the income stream, you will receive that amount the rest of your life, unless market performance forces the protected withdrawal value up. Once the new withdrawal value is established it can never go down regardless of the account's value,even it the account goes to zero, unless you withdraw funds from the account.. The other side's value is determined by market performance and what the death benefit based upon. the income can also be set up to pay out as long as either spouse is alive. The account

[SukiChu]

Jackson National Life Insurance has the same investment (annuity) as Prudential. We are also considering this program, but I won't invest with Prudential again. Our financial advisor told us we have the option of going with Prudential or Jackson. It is the same program. It sounds like a great opportunity plus your initial investment amount comes back to your heirs when die.....at least that is my understanding.

[KayakerNC]

Be very very careful.
Annuity Analytics: What is a Guaranteed Rate Really Worth? (http://www.advisorone.com/2009/08/01/annuity-analytics-what-is-a-guaranteed-rate-really)

[NJblue]

Kayaker, thanks for the link. It is an interesting way to look at the value of a variable annuity and I tend to share the author's skepticism. However, to be fair, what the author portrays is the worst case scenario for the value of the lifetime withdrawal benefit (i.e., that it only grows at the guaranteed rate).

However, if the non-worst case scenario actually unfolds, the value of the amount used to calculate the withdrawal rate could be higher than the guaranteed amount. This is because most plans are tied to the highest value achieved in the sub-accounts. They also have a ratchet mechanism such that even if the value in the sub-accounts decline in the future, the value of the guaranteed withdrawal base stays at the higher level - and then proceeds to grow from there at a rate at least what the guaranteed rate is.

To me, one of the biggest problems with annuities in general (not just variable annuities) is the effect of inflation. Sure, 5% for life seems like a reasonable return - especially if it is guaranteed. However, inflation can eat that up such that the buying power of that 5% erodes to next to nothing. Proponents of variable annuities will claim that if the underlying value of the sub-accounts rise during inflationary periods, the withdrawal amount has the potential to rise as well. In theory this is correct. However, in reality, once you start making withdrawals (which are also subtracted from the sub-account values), it takes a VERY large increase in the market to offset these withdrawals such that the value of the basis for withdrawal amount can rise - thus allowing for an increase in the annual withdrawal.

[EdV]

If inflation is your concern with an annuity, then take a look at inflation protected single premium immediate annuities (IP SPIA).

[KayakerNC]

[QUOTE=NJblue;498657However, to be fair, what the author portrays is the worst case scenario for the value of the lifetime withdrawal benefit (i.e., that it only grows at the guaranteed rate).
However, if the non-worst case scenario actually unfolds, the value of the amount used to calculate the withdrawal rate could be higher than the guaranteed amount.[/QUOTE]

Pie in the sky?
If anyone is considering one of these things, the guarantee is the ONLY thing they should count on. With all the contractual Caps and Participation Rates the insurance industry has in place, that is probably the max you can get.

[aljetmet]

Jackson National Life Insurance has the same investment (annuity) as Prudential. We are also considering this program, but I won't invest with Prudential again. Our financial advisor told us we have the option of going with Prudential or Jackson. It is the same program. It sounds like a great opportunity plus your initial investment amount comes back to your heirs when die.....at least that is my understanding.

Hi neighbor!

Is there a link you can provide a list of the details?

thanks,

[GatorFan]

I have the product and am in the process of buying another as we speak. First one was a roll over IRA. The one I am doing now is from a savings account.

Brad Shepherd is my agent and he can be reached at: 347-9201

[NJblue]

If inflation is your concern with an annuity, then take a look at inflation protected single premium immediate annuities (IP SPIA).

The problem with these is that you pay for the inflation protection with reduced return.

[aljetmet]

Do you really need inflation protection if you take out less than your earn?

For example, I plan on managing my own investments. I plan to withdraw 4% per year. If I earn 5% year, inflation is automatically taken care of. For example, $1 million initial investment turns to be worth $0.763 million after 30 years. Withdrawls equate to $1.756 million. In this case I forecast to increase the withdrawl by 2.5% a year.

If I earn only 4% a year then I withdraw the same but am left over with $0.188 Million.

[NJblue]

Do you really need inflation protection if you take out less than your earn?

For example, I plan on managing my own investments. I plan to withdraw 4% per year. If I earn 5% year, inflation is automatically taken care of. For example, $1 million initial investment turns to be worth $0.763 million after 30 years. Withdrawls equate to $1.756 million. In this case I forecast to increase the withdrawl by 2.5% a year.

If I earn only 4% a year then I withdraw the same but am left over with $0.188 Million.

I'm not sure I'm following your numbers. Depending upon the inflation rate, at some point the amount that you will need to live on will be greater than the amount that you will be getting from the annuity. At that point you will be eating into whatever reserves you may have accumulated by your initial plan to live under your means. How soon you begin eating into the reserves and how long they last is a function of the inflation rate.

If you assume only a 2.5% inflation rate, that may not be adequate over a long horizon. By my back-of-the envelop calculations, a 5% inflation rate will deplete your reserves by year 10. If we get to a hyper-inflation as some are predicting based on deficits, etc. (say 10%) your reserves will be depleted by year 6. Even if we could go on at 2.5% inflation indefinitely, by year 19 your reserves would be negative.

[NJblue]

Pie in the sky?
If anyone is considering one of these things, the guarantee is the ONLY thing they should count on. With all the contractual Caps and Participation Rates the insurance industry has in place, that is probably the max you can get.

If we evaluate our investments by eliminating all risks, we are left with a very low-performing set of alternatives. I am not a big fan of annuities, but I have evaluated them in great detail and there are many examples over the years where the market performance was such that the amount that determines the annual withdrawal amount exceeds the guaranteed minimum.

Yes, you can choose to ignore these scenarios in favor of the worst case, but if you really want to take a no-risk approach to investment analysis, you need to do it for the alternative investment options as well. I guess that leaves one with CDs - which today lose money to inflation every year.

[aljetmet]

I'm not sure I'm following your numbers. Depending upon the inflation rate, at some point the amount that you will need to live on will be greater than the amount that you will be getting from the annuity. At that point you will be eating into whatever reserves you may have accumulated by your initial plan to live under your means. How soon you begin eating into the reserves and how long they last is a function of the inflation rate.

If you assume only a 2.5% inflation rate, that may not be adequate over a long horizon. By my back-of-the envelop calculations, a 5% inflation rate will deplete your reserves by year 10. If we get to a hyper-inflation as some are predicting based on deficits, etc. (say 10%) your reserves will be depleted by year 6. Even if we could go on at 2.5% inflation indefinitely, by year 19 your reserves would be negative.

I'm not using an annuity. That was my point.

I start the first year at a 4% withdrawal but then increase it at a reasonable inflation rate of 2.5%. If inflation goes much higher than 2.5% couldn't I just buy a 30 year treasury bond to protect the inflation rate? In other words if inflation goes up you can expect your returns to keep up. Let's compare envelopes. (Even at 5% inflation you run out at 26 years

If your annual rate of return is higher than the initial withdrawal you should be ok

investment annual earnings withdrawal
1000000 0 5% (increase 2.5%)
year1 1010000 50000 40000
year2 1019500 50500 41000
year3 1028450 50975 42025
year4 1036797 51423 43076
year5 1044484 51840 44153
year6 1051452 52224 45256
year7 1057637 52573 46388
year8 1062971 52882 47547
year9 1067384 53149 48736
year10 1070798 53369 49955
year11 1073135 53540 51203
year12 1074308 53657 52483
year13 1074228 53715 53796
year14 1072799 53711 55140
year15 1069920 53640 56519
year16 1065484 53496 57932
year17 1059378 53274 59380
year18 1051482 52969 60865
year19 1041670 52574 62386
year20 1029808 52084 63946
year21 1015753 51490 65545
year22 999358 50788 67183
year23 980463 49968 68863
year24 958902 49023 70584
year25 934498 47945 72349
year26 907065 46725 74158
year27 876406 45353 76012
year28 842315 43820 77912
year29 804570 42116 79860
year30 762943 40229 81856

[NJblue]

OK, when you talked a 5% earning rate, I assumed you meant under the umbrella of the annuity that was discussed. I guess my next question would be - where are you going to find an investment that grows at a constant rate of 5%?

[buzzy]

Amazing how things have changed. In 2007, a year before retirement, a fee-based financial planner ran our cash-flow simulations. The model predicted a 95% chance of our savings lasting 30 years. Back then, they were still using a 9% earnings rate in the model. Since retirement, we have been getting 3%.

[GatorFan]

The Prudential Product may not be for everyone but It is worth inquiring about before forming an opinion.

[BobKat1]

Our financial planner/advisor recommends the Prudential product IF we are interested in an annuity.

[SukiChu]

Hi Neighbor ! The only information I have at the present time is the booklet that our financial advisor left for us. The website is www.Jackson.com. There may be more information on the web. (you go first and let us know how it's working out!)

[CaptJohn]

Amazing how things have changed. In 2007, a year before retirement, a fee-based financial planner ran our cash-flow simulations. The model predicted a 95% chance of our savings lasting 30 years. Back then, they were still using a 9% earnings rate in the model. Since retirement, we have been getting 3%.

Oh, well, back to work! :eek:

[aaffmom]

Jackson is not the same. Pru locks you in at the highest daily market value and that grows at 5% for income for life. If market goes down your income protection does not.

If you are looking for a product with guarantee income for life check the Prudential product.