Charlie Gipple, CFP, CLU, ChFC

Created by OpenAI, ChatGPT is one of a few different platforms that people are talking about today. This is a chatbot where you can punch in questions and it will answer you back. This is a class of artificial intelligence that uses “Machine Learning.” Machine learning is where the system basically “learns” and collects data as time goes by. Think of a chess game. If you are a veteran chess player, the history of the moves that the other person takes as well as your predictions on what they will take usually informs us of what our next move should be, based on our history of success with making that next move. If you are a newbie to chess, you don’t have much intuition about your competitor’s previous moves and you have very little prediction powers on next moves. Well, “machine learning” has an almost infinite capability of remembering the past patterns and then drawing inferences into the future. ChatGPT does this not with chess, but with almost any question you throw at it.

What is my verdict on if AI is going to replace the financial professional anytime soon? I will opine on that at the end of this article. But first, feel free to eavesdrop on a conversation between me and AI (ChatGPT).

On my LinkedIn page (have you “followed me” yet?) I recently discussed a bit of a case study where a client came to me and said his dad wanted to either “gift” the farm to him now or wait until after he (the dad) dies to pass the farm on via inheritance. I think this is a great topic to discuss with ChatGPT because it is very nuanced in that there are many things to take into consideration; estate taxes, stepped up cost basis, gift taxes, Medicaid, etc. So, let’s see if the system can hang with us mere mortals.

Without boring you with the nuances of this exact case, my preliminary recommendation without speaking with his dad—as we will—is that the land will likely be better passed on after death rather than via gifting, largely because of the stepped-up cost basis tax treatment. Don’t know what that is? ChatGPT will tell us in a bit.

Now, in hindsight, let’s take the above example and see if my client could have received the same advice that I gave him by using ChatGPT.

My question to ChatGPT:
“Should I gift my assets, or should I wait until I die?”

ChatGPT answer (cut and pasted):

“Deciding whether to gift your assets during your lifetime or to wait until you pass away is a personal decision that depends on your individual circumstances and goals. Here are some factors to consider:

1. Estate taxes: If your estate is large enough to be subject to estate taxes, gifting assets during your lifetime can help reduce the taxable value of your estate and minimize your estate tax liability. However, it’s important to consult with a qualified estate planning professional to ensure that your gifting strategy is structured in a way that is tax-efficient and meets your long term financial goals.
2. Medicaid planning: If you anticipate needing Medicaid benefits in the future, gifting assets during your lifetime can help reduce the value of your assets and make you eligible for Medicaid sooner. However, there are rules and restrictions around gifting for Medicaid purposes, and it’s important to consult with an experienced elder law attorney to ensure that your gifting strategy is structured in a way that is compliant with Medicaid rules and regulations.
3. Control over assets: Gifting assets during your lifetime means that you are relinquishing control over those assets and transferring ownership to someone else. If you want to maintain control over your assets and continue to manage them, it may be better to retain ownership of them until your death.
4. Gift tax: If you gift assets during your lifetime, you may be subject to gift tax if the value of your gifts exceeds the annual gift tax exclusion amount. However, there are ways to structure your gifting strategy to minimize or avoid gift tax liability, such as using the lifetime gift tax exemption or making gifts to a qualified charitable organization.

Ultimately, the decision to gift your assets during your lifetime or wait until you pass away depends on your individual circumstances and goals. It’s important to consult with a qualified estate planning professional to assess your options and develop a comprehensive estate plan that meets your needs.”

I would give ChatGPT’s response a grade of about a D. Afterall, it didn’t even discuss the notion that when one inherits property upon death, the cost basis “steps up,” which can ultimately lead to less taxes later on. However, if you ask ChatGPT specifically about “stepped up cost basis,” it does a very good job of explaining what it is.

I do like that it brought up Medicaid planning! If assets are gifted today, then the dad may be able to qualify for Medicaid later on. Of course, there is a five-year lookback to take into consideration but at least ChatGPT showed us Medicaid as an item to take into consideration. I also like the fact that it teased on the “annual gift tax exclusion” as a way to gift assets!

My verdict? I want to split my verdict into three areas:

1. Recommendations: When a client wants to get down to brass tacks on recommendations, the system does not (yet) cover all the bases that need to be taken into consideration. The peripheral vision when it comes to financial advising is not on par with a seasoned professional. Again, for our purposes, I would give it a D grade.
2. Fine Details: When I asked the system, “What is stepped up cost basis?” it knocked the ball out of the park. Like I mentioned, it does a very good job of explaining what something is, but so does Google. However, I did ask the system about other topics like estate taxes, etc., and it did OK. In this area, I give the system a B+. As time goes on, the “machine learning” will make it more precise.
3. General Knowledge/Marketing: For this, I give it an A! Not an A+, but an A. I think ChatGPT makes a good living/breathing brochure! This is where you—the financial professional—can save a significant amount of time via articles, blogs, teasers, social media posts, etc. I have begun to do this with my clients while always making it clear that the article was “Powered By AI.”(Sidenote: I do fear that AI will make the writings in our world less “genuine.”)

Anyway, you be the judge of its effectiveness below as I take a random topic of living benefits on life insurance. Is this an article you would find worthy for general education? I think so!

My question to ChatGPT:

“What are living benefits on life insurance?”

ChatGPT answer (cut and pasted):

“Living benefits on life insurance are features that allow the policyholder to access a portion of the death benefit while they are still alive, in certain circumstances. These benefits can provide financial assistance to policyholders who experience a qualifying event that impacts their health and ability to work. Here are some examples of living benefits on life insurance:

1. Accelerated death benefit: This benefit allows the policyholder to access a portion of the death benefit if they are diagnosed with a terminal illness that is likely to result in death within a certain timeframe. The accelerated death benefit can be used to cover medical expenses or other costs associated with end-of-life care.
2. Critical illness benefit: This benefit allows the policyholder to access a portion of the death benefit if they are diagnosed with a critical illness, such as cancer, heart attack, or stroke. The funds can be used to cover medical expenses or other costs associated with the illness.
3. Chronic illness benefit: This benefit allows the policyholder to access a portion of the death benefit if they are diagnosed with a chronic illness that results in the inability to perform a certain number of activities of daily living, such as bathing, dressing, and eating. The funds can be used to cover long term care expenses or other costs associated with the illness.

Living benefits on life insurance can provide policyholders with greater financial flexibility and security during challenging times. It’s important to review the terms and conditions of your life insurance policy to understand what living benefits are available and how they can be accessed. Additionally, it’s important to consult with a qualified insurance professional to determine if living benefits are appropriate for your individual situation.”

Overall, I still feel very secure in my job not being replaced anytime soon, while having the ability to leverage AI instead of competing against it.

To immediately squash the suspense, you are not going to read this article and see that one type of long term care policy is better than the others. It is solely dependent on what the consumer is looking for that will determine their “best” choice. As I will show you in the included table, each of the three product areas that I will be discussing excels in one area where the other two may not. It is all a matter of what the consumer is looking for.

The purpose of this article is to compare a few of the various options from a numerical standpoint so that, whether you are a financial professional that is not yet “long term care savvy” or a consumer that is looking to address this very prominent risk (long term care), this article is for you.

I will not get into the weeds a whole lot in this article with things like reimbursement, indemnification, shared care, tax deductions, partnership, etc. In this article I wanted to show you how I usually start my analysis of the various long term care options that exist today which, again, is largely about numbers. Usually, after I look at the numbers is when I will drill down from there and get into “the weeds”—which is beyond the scope of this article.

The obvious main reason that people buy long term care insurance is so the insurance company pays a benefit—usually identified as a daily benefit or monthly benefit—if that person can no longer take care of themselves. Common triggers for these benefits to be paid out are: To be unable to perform two of the six activities of daily living for a 90-day period of time or to have severe cognitive impairment.

Although the above reason for purchasing long term care insurance may seem obvious, choosing one long term care product over another usually has to do with much more than just what the long term care benefit is. For instance, one consumer may be concerned about the policy being a “use it or lose it” proposition. Meaning if the consumer just dies without ever needing the long term care benefit, then what would the beneficiary get if anything? Another consumer may be concerned that they may want to change their minds ultimately and not pay for long term care insurance anymore. Can they change their minds without losing everything they put in?

Because of the above concerns by consumers, as well as historically low interest rates for the longest time that have forced insurance carriers to think outside the box, we have had huge product innovations in the long term care insurance space. These innovations are indeed wonderful but could also be confusing to a consumer looking at the various options. Furthermore, financial professionals are oftentimes confused with the various long term care options that exist today. So, this article is to give everybody ideas on how to compare long term care options, at least at a high level. Future articles might get in “the weeds” a little more.

The Numbers: Live, Die, or Quit
The spectrum that I compare the various long term care options on is the “live, die, or quit” spectrum. In analyzing products, I will plot out—whether mentally or on a spreadsheet like the included chart—the values of each policy across three different objectives.

1. Live: If the client lives and needs care, what is the total long term care benefit that can be paid over the client’s life and also the maximum monthly benefit that the consumer can get access to if he/she triggers the benefits?
2. Die: What if our client dies without ever needing long term care benefits? Did they waste their premium or is there a death benefit? Example, traditional LTCI has historically been known to be a “use it or lose it” proposition.
3. Quit: What if the client wants to quit? For whatever reason he/she no longer wants the policy. Is there a surrender value that he/she can get access to, or was it all for nothing?

I plotted out three different product types across my Live, Die, Quit spectrum. The product types are:

• Traditional Long Term Care Insurance
• Hybrid Life/Long Term Care Product
• Hybrid Annuity/Long Term Care Product

The Lazy Money Scenario
When I ask consumers that do not have long term care insurance how and from what source they will pay for their long term care if they need it (which is very probable), they will usually point to their savings account or certificates of deposit. That is a natural inclination because that is money that is generally more “liquid” than their IRAs or 401ks. That is when I will show them the power of moving that “lazy money” (that is likely not earning much interest) over to one of these products. By doing so, they can oftentimes get more interest on their money, more death benefit, and/or use the power of leverage when it comes to long term care buying power. Their money is now working for them instead of being lazy! Allow me to explain.

The chart assumes a single premium moving into each of our three products. There are no more premiums that our consumer needs to pay in this scenario. This is the simplest scenario to look at when differentiating products because it easily shows the long term care leverage per dollar of premium, the death benefit leverage per dollar of premium, and the liquidity per dollar of premium. I could have also made a chart with “ongoing premiums,” because not everybody has $100,000 laying around and may prefer to spread the premiums out. However the overall story on the long term care leverage and death benefit leverage would also apply to the ongoing pay scenarios, just to a different extent. (Ongoing premium example, the same benefit on a traditional LTCI policy that is paid for life would only be around $5,000 per year, versus a lump sum of $100,000.)

It is important to point out some details before jumping into the chart. The annuity is very rigid in that it has limited options in benefit periods. This product triples the consumer’s money for purposes of the total lifetime long term care pool. Again, the money is working immediately! Now, if one needs care, they cannot take the $300,000 (triple of our $100k) out all at once. It has to be spread over 72 months. In other words, the benefit period is 72 months, which makes the maximum monthly long term care benefit $4,167 ($300,000 divided by 72). For these long term care annuities, this 72-month benefit period is a common design although there are some annuity offerings where you can choose other benefit periods. My point is, although the traditional LTCI and the life/long term care hybrid can have shorter benefit periods—which means higher monthly maximums—I illustrated all of these products to have a 72-month benefit period. I wanted to keep it as “apples to apples” as possible. I also kept it simple without choosing inflation options on the benefit.

Who Wins in What Scenario?

• Traditional LTCI: Traditional long term care insurance has the most long term care leverage of any of these products, as represented by the green highlight. This product will give our 60-year-old female a benefit pool of almost $600k and a monthly benefit of $8,220. If it is purely long term care leverage without regard to other bells and whistles, traditional LTCI wins. Now, although there are sometimes return of premium options on traditional LTCI that can potentially give a beneficiary a death benefit, I did not illustrate it here because I wanted to demonstrate the significant long term care leverage that traditional LTCI can provide. That leverage gets watered down when you add the ROP. The “Live” scenario is where LTCI shines! Also, traditional LTCI is very modular as far as various benefit periods, inflation options, shared care, etc. Again, let’s keep this bearable!
• Life/LTC Hybrid: Because this is whole life insurance at its foundation, you can guess that the “Die” scenario is where this generally beats the other two options. The death benefit is the highest at $179,122 for our 60-year-old female. It also provides cash value that grows on a guaranteed basis. As you can see, the cash value is only $75,952 in year one, but it grows throughout the life of the contract (assuming no withdrawals or claims). If she “Quits” the policy in year 15, although not advised, she would get back $111,699. This particular policy pays benefits on an indemnification basis versus reimbursement but, again, let’s not go there for now.
• Annuity/LTC Hybrid: Because this is on an annuity foundation, the consumer’s money has the ability to grow, even after the monthly long term care charges. Thus, this product generally wins the “Quit” scenario. This annuity pays an interest rate of 4.5 percent (as of this writing) in year one and can adjust thereafter. If she “quits” in year one, she can get out $95,015 after surrender charges. (Note: This product is a nine-year product.) If she “quits” in year 15, she can get back $162,217, assuming the 4.5 percent remained constant up to that point and no withdrawals or claims were paid. The “Die” scenario is very good as well as her beneficiaries will get back the accumulation value that is free of surrender charges at any point in time should she pass away. This policy has the lightest underwriting of any of them, but again…

As you can see, there are various reasons for various consumers to choose any one of the products. Not any one is “the best” until the financial professional knows what the consumer is looking for.

What happened to Silicon Valley Bank—along with Signature Bank—that represents the two largest bank failures since the financial crisis? Silicon Valley Bank failed because of six primary reasons, among other things:

1. Deposits were drying up relative to in the past and relative to SVB’s expectations. Because SVB’s customers were largely startup companies and because the economy had been rough on those startup companies, that meant these customers needed their cash back from the bank (SVB). Furthermore, with deposit interest rates being less than other places that startups can put their money, deposits left SVB.

2. Because of the above loss in deposits, the bank needed to raise capital in order to meet reserve requirements that banks have to abide by. They did this by selling long-term bonds that were not yet at maturity. Many of these bonds were Treasury bonds that they had to sell at significant losses. These losses were because of the fact that interest rates have risen so much over the last couple of years.

3. Because of the concerns of these losses that Silicon Valley Bank was now recognizing, there was a good old-fashioned “run on the bank.” These startup companies swarmed to the bank to take out their deposits, which further exacerbated the issue.

4. The run on the bank happened because the average account balance at Silicon Valley Bank was well into the seven-figures versus the $250,000 that FDIC covers. As a matter of fact, somewhere around 90 percent of the $175 billion that the bank had in deposits was “uninsured,” meaning that those dollars were above the $250,000 threshold.

The FDIC was created back in the great depression (1933) to provide consumers with this protection and to avoid runs on the bank. However, when you have more than $250,000 at a bank, the FDIC insurance does little to keep you from “running to the bank” to get your money. Hence, in the SVB scenario, the government later rushed in to make an exception and back-stop all deposits, regardless of the size. The reason being, this was “systemically important” because of the dollar size we were looking at and the potential “contagion.” (Note: I believe that large banks having a blank check by the government will unfortunately direct the flow of capital away from smaller regional banks to those large banks. The big will get bigger. But I digress.)

5. Asset/Liability Duration mismatch: In my college banking classes, one of the most basic things we learned is that assets’ and liabilities’ duration should be matched to each other as much as possible. This is another reason that SVB failed. The liabilities—which were deposits—had a very short “duration“ relative to the assets backing them. The liabilities were not very sticky (obviously). The assets backing those liabilities were largely long-term bonds that needed to be liquidated. That in turn created significant losses, as interest rates have skyrocketed over the last year. To oversimplify, in a perfect—and impossible—world, the assets being liquidated would have been right at maturity when the deposits were fleeing, which would have avoided losses.

6. The inverted yield curve (brought on by the Fed) hasn’t helped banks either. Because banks usually borrow money short term and lend money long term, banks’ “net interest income“ has been suboptimal. (Note: Insurance companies generally borrow money long term and buy bonds that are long term. Asset duration=Liability duration.)

Are Annuity Companies Next?
I do not believe that annuity companies will follow the same path as Silicon Valley Bank (and other banks to come). There are two primary reasons for this:

1. Annuities with surrender charges and market value adjustments are significantly “stickier” to insurance companies than what bank deposits are to banks. Therefore, carriers being forced to raise capital because of “runs on insurance companies” is not likely. Even if that did happen, carriers have the ability to pass-through bond losses via market value adjustments—at least with annuities. MVAs were created for times like this and are a good thing in this type of environment because they insulate carriers from interest rate risk that pummeled SVB.

Because of the inability of consumers to easily access their annuity money, the matching of duration on assets versus liabilities is much easier for insurance companies, which helps everybody—the companies and the consumers that rely on the financial stability of the companies.

2. Insurance carriers do not practice “Fractional Reserving” that banks utilize. “Fractional Reserve Banking” is a fancy term for, “If you deposit $10 at a bank, that bank only needs one dollar on hand and can lend out or invest the other nine dollars.” Of course that example assumes a 10 percent “reserve requirement” as set by the Federal Reserve. “Fractional Reserving” is leverage.

To oversimplify, this means that the $100,000 that you see on your bank statement is backed by only $10,000 that the bank has on hand! Needless to say, this can create significant “asset sales” when the customers want their deposits back, as we saw with SVB. The banking regulators’ justification for the “Fractional Reserve System” is that the FDIC is “usually” there to back the deposits if the bank cannot. Plus, fractional reserving does create more money in an economy, which can be a good thing. Can be a bad thing too.

Insurance companies are not able to use “Fractional Reserving” but rather abide by a “Legal Reserve” system. This means that one dollar that customers have at an insurance company is backed by at least one dollar that the company can access. This might create less profit for insurance companies versus banks in good times, but it also means less drama than the banks in the bad times!

Now, a risk that insurance companies do face is: What if the bonds that the carrier purchased were bonds issued by one of these failing banks? This is indeed a risk that insurance carriers face, especially if this “crisis” gets worse. However, the reports that I have read show that the largest exposure to SVB by an insurance company was nothing of consequential size.

Contagion—in addition to direct exposure—is also a risk for insurance companies, at least if this crisis gets worse. An example of contagion might be where an insurance company is exposed to a bond that was issued by a customer of the banks that went belly-up. Or, a bond that was issued by a bank of a customer that is a customer of a bank that went belly up.

Counterparty risk can also be a concern. A “counterparty” would be one of the banks where insurance companies buy their hedges/options. If one of these banks go belly-up, the insurance companies would be left holding the bag on indexed products, or other areas in their portfolio where they have “hedged” certain risks. I don’t view counterparty risk as a huge concern at this point because insurance companies usually use the mega banks as counterparties. As mentioned, the mega-banks may actually get more “mega” as a result of what is happening.

I would not say that the current crisis that the banking industry is dealing with is a great thing for the insurance industry, but it is not necessarily a horrible thing either. Afterall, much of the money that is leaving banks is going to insurance companies, because of the ability to get higher rates on those savings. I would bet that anybody reading this article that does annuity business has had a client or two write a $100k check from their bank account to an annuity that is paying a higher rate of interest.

Additionally, because of the way the bond market works, investment grade corporate bonds’ yields have actually increased in recent days, even though the 10-year Treasury has lost 60 basis points in a short time. Hence, credit spreads have increased. These higher corporate rates help insurance companies make even better products!

Lastly, in times of turmoil, annuities do well. Annuity sales did well in the great depression, they did well during the financial crisis, and they will do well now!

I recently saw somebody write about how we should not compare annuities to the four percent rule. Although I agree that there needs to be additional disclosures and education in the annuity part of the conversation, I disagree with not comparing the two.

Re-Anchor Clients in Reality, Not Fairy Dust
I believe that consumers tend to “anchor” their retirement income expectations on the wrong thing and therefore should be “re-anchored” in reality. For instance, consumers should be educated on the fact that William Bengen’s study in 1994 showed that in order to sustain a stock/bond retirement portfolio for 30+ years in retirement, the consumer should take out no more than four percent of their retirement account balance that first year in retirement, adjusted each year thereafter for inflation. Consumers should also be aware of the new updated studies that show “rules of thumb” of 2.3 to 2.8 percent. (Note: When using these comparisons versus annuities, it is important to discuss that annuities generally do not have “inflation adjustments” the four percent rule incorporates. More on that in a bit.)

This “re-anchoring” is important because many consumers know that the S&P 500 has gone up double digits on average for the last century and therefore overestimate what withdrawal rate they should utilize. They have seen the glorification of the stock and bond markets and have likely seen the mountain charts like the Ibbotson SBBI Chart. You know what charts I am referring to; those that show that the stock market has done double digit returns forever and that their $1 invested back when Adam met Eve would be worth enough to purchase their own private island today.

Thus, if a consumer has in their brain that stocks and bonds have always performed seven percent, eight percent, 10 percent, 12 percent, then they will tend to believe that their retirement withdrawal rate is beyond the four percent that the research shows. Even if a consumer has heard of the four percent withdrawal rule, they may have not had the math laid out for them yet that is specific to their situation. It is important to explain to those that love their stocks and bonds—as I do—that even though the S&P 500 could average 10 percent over the coming years, it does not mean they will not run out of money by taking only four percent of the retirement value from their stock and bond portfolios! How is this possible? Because of the sequence of returns risk that the stock portion can subject the client to and the low interest rates (still) that affect the bond portion. And because of these two risks a client should not overestimate what their portfolios can do as far as withdrawal rates. If you would like a graphic that helps you explain the sequence of returns risk to your clients, email me.

To demonstrate my points in the previous paragraphs, I want to cite a study by Charles Schwab. In their 2020 Modern Retirement Survey they asked 2,000 higher net worth pre-retirees and newly-retired retirees about how much money they had saved for retirement and also how much money they expected to take from their retirement portfolios. The answers from the participants were that they had $920,400 in retirement savings on average, that they planned on spending $135,100 per year from those portfolios on average, and that they were generally confident in those dollar amounts allowing them to live the retirement they would like.

I would argue that a 14.68 percent withdrawal rate ($135,100 divided By $920,400) defies any retirement research I have seen! Naturally, Schwab then points out that—contrary to these participants’ beliefs—a $920k portfolio will run out in only seven years (obviously not including interest/appreciation). Clearly, these consumers should have the math explained to them. Even if the consumers understand the new rules of thumb, they may be experiencing cognitive dissonance that should be addressed by the financial professional. By doing so, you will “re-anchor” their expectations to the new realities of 2.3 percent, 2.8 percent, or four percent withdrawal rates, which will set you up for the annuity conversation that we’ll discuss.

I am not suggesting an agent go into a big dissertation on these individual studies. I just believe that going over the simplified math—specific to the client’s portfolios—based on these new rules of thumb should be done in order to show the power of annuity GLWBs. Although generous, using the old four percent rule of thumb will suffice in explaining the annuity value proposition. By demonstrating this math to the clients, you will be re-anchoring their expectations to realistic numbers. And only then do I believe they will realize the true power of GLWB Riders.

The GLWB Conversation
Here is what my conversation looks like that I will walk our hypothetical client through:

Let’s say our 63-year-old has $100,000 in a stock and bond portfolio. I start by discussing how this 63-year-old may have the expectation that her $100k grows by five percent or so per year between now and retirement in two years. Well, based on her $110,000 (not including compounding) value at that point, what withdrawal should she take in her first year of retirement? This is where I discuss the four percent withdrawal rule, which usually surprises them because their anchoring is off. I also discuss the reasons for the withdrawal rate being only four percent. But then I will show her $100k growing to $110k in two years at retirement. If the client wants us to assume a 20 percent return over two years, fine! I will do that instead. The math still works.

By the end of the two years, her $100k has grown to $110k. That is when we figure the first-year withdrawal, which comes out to $4,400. Again, that $4,400 is supposed to increase with inflation, per the four percent rule.

That $4,400 is assuming everything goes correctly. That is, that she gets 10 percent appreciation between now and age 65, and also the four percent being indeed sustainable over her 30-year retirement.

That is when I will switch to the annuity. On one of the industry’s top annuities/GLWB riders right now, her $100,000 will generate a $7,800 payment starting two years from now, guaranteed. That payment will go on forever. This GLWB payment is 77 percent higher than what our four percent withdrawal rule will provide. And you don’t have the “hoping and praying” with the annuity. Usually at this point in the discussion, the responses are in three different areas:

1. Seems too good to be true! How can the company do that? (This is a topic for another article.)
2. What if everybody lives forever? Will the company go out of business? (Again, a topic for another article.)
3. But what about inflation? The four percent rule includes inflation, and the annuity does not.

Let’s discuss.

Level Annuity Payment Versus Four Percent with Inflation
Although I believe we are being generous to the situation by using the four percent rule instead of the more updated and lower rules of thumb, it would be disingenuous to not explain the lack of inflation on the level payout GLWBs. (Note: There are some GLWBs that have increasing income, but let’s leave the conversation to level income for now.)

This objection about annuities not having inflation included, versus the four percent rule, is a reasonable objection as inflation adjustments can be crucial. As a matter of fact, the “inflation rule of 72” says that a 3.5 percent inflation rate—for example—will chop the purchasing power of a dollar in half in only 20.5 years (72/3.5=20.5 years). Meaning that $7,800 would only have the purchasing power of $3,900 in 20.5 years assuming 3.5 percent inflation.

So then what provides the highest cumulative income, our GLWB or the four percent rule example? Above is a graph from a spreadsheet I created to show what provides more income—the $7,800 (GLWB) without inflation adjustments or the $4,400 (four percent rule) with inflation adjustments. (Note: For the inflation adjustments, I assumed 3.5 percent.)

As you can see above, the inflation adjusted four percent rule annual income crosses over to where it is more than the $7,800 in the 18th year. You can see the two lines crossing over. The dollar amounts represented by the lines are in the right axis.

More important however is, what is the cumulative income from each strategy over a period of 30 years? That is represented by the bars and the left axis labels. As you can see, the Cumulative GLWB Income (black bar) stays higher than our cumulative four percent rule all the way through the 30-year retirement. Furthermore, this does not incorporate “time value of money” of the amount of excess GLWB payments we got above and beyond the four percent rule. Technically, those excess dollars reinvested would equate to even more than what our “cumulative” black bar is showing.

Clearly, there are other scenarios that we could run that can benefit or degrade the story on either one of the two solutions. For instance, we could run the four percent rule assuming a much higher return than 10 percent over two years—for example 20 percent. In that case, the “cumulative withdrawals” on the four percent rule overtake the annuity in the 27th year. But then we could also apply the “time value of money” to the excess annuity payments. We could also use the 2.8 percent withdrawal rule. Or, one could add different inflation rates, etc.

In the end and with all of this said, the story should be that consumers need to anchor their expectations reasonably and also that annuities have a great place in many consumers’ portfolios with or without inflation.