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Ask the expert: Annuity suitability in an income plan

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The question was: What is a good way to determine the suitability of using an annuity as part of an income plan for my clients? The answer is: “Once the know-your-client process is complete, there are many techniques to determine whether an income annuity is a suitable solution. The following six steps represent just one of those techniques for consideration and adaptation: ” 1) Inventory those dependable sources of income, such as Social Security, other government programs, pension plans, or other reliable sources proviging monthly income (e.g., the monthly payments as a result of the sale of an asset).
” 2) Add up the total reliable long-term monthly income available to meet the cleint’s needs found in Step 1.
” 3) Determine the client’s wanted/needed monthly income to maintain the standard of living.
” 4) Determine the X factor, which is the currently available monthly income short fall from the desired income. The X factor is the difference between the desired income determined in Step 3, and the available income calculated in Step 2.
” 5) Multiply the annual X factor by by twelve to determined the annual X factor.
” 6) Multiply the annual X factor by twenty in order to determine how much capital generating a 5 percent X factor net annual return would be sufficient to provide an amount of income equal to the annual x factor.” Excepted from Retirement Income Planning, 1st edition, Retirement Income Planning, a book in the Tools & Techniques series published by the National Underwriter Company, Cincinnati, Ohio. The co-authors are Stephan R. Leimberg, Benjamin G. Baldwin, Aaron Coates, Robert S. Keebler, Michael E. Kitces, and William J. Wagner. Rick Kahler is a contributing author.

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