Maximizing Social Security with Specialized Annuities FIFO-FIAs and FIBO-DIAs

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The number one concern that retirees have is running out of money, and it’s for a good reason. Many Americans nearing retirement have been unable to produce adequate savings. Company pensions are all but extinct. While many people understand the concept of saving and investing, few truly understand what is required to convert assets to income in retirement. In a day and age when people are living longer and longer, it only makes sense for advisors and their clients to turn their attention to maximizing one of the most powerful sources of retirement income — Social Security.

Not only does Social Security offer a guaranteed paycheck for life, it also has built-in inflation protection in the form of COLAs (cost-of-living adjustments). This is a great deal for retirees and they need to make the most of it. You can show them how! Maximizing Social Security by deferring payments allows retirees to receive a larger portion of their monthly and annual retirement income from their benefits. This grants them the freedom to save their other qualified and non-qualified assets and invest for unfettered growth, or the flexibility for worry-free spending. It can also create the opportunity to leave a lasting legacy for a clients’ family and future generations instead of draining retirement assets to exhaustion and leaving them with a financial burden.

While the reasoning for maximizing Social Security benefits is simple, implementation requires thoughtfulness, innovative financial products and a thorough understanding of retirement income planning. Some of the questions you’ll need to answer include: “From where are clients going to receive income during the eight years of delay, ages 62 to 70? What will their retirement look like if they are able to delay to age 70 compared to claiming early? Most importantly, is it worth it not to claim prior to age 70?”

In a previous article for NAFA Annuity Outlook (available on the website), I wrote about using a period-certain income annuity to help bridge the income gap while delaying Social Security. The idea was to take money from non-qualified assets and move it into a period-certain income annuity for the Social Security delay period. Not only does this provide income for the client, but it can help “bracket-bump” them into a lower tax bracket since income annuities are protected by the tax exclusion ratio. The savings that this strategy provides can also create an opportunity to begin converting some of their pre-tax qualified money into after-tax ROTH money, reducing their future tax burden.

Much has changed in the last year and now there are even more powerful tools available to help clients bridge the gap while delaying Social Security and creating a steady stream of retirement income. Two products I’d like to introduce are what I call a FIFO™ FIA (First In/First Out Fixed Indexed Annuity) and a FIBO® DIA (First In/Blend Out Deferred Income Annuity). In combination, these can be our industry’s most powerful tools to help maximize Social Security income.

From Zero to Hero: Creating a Rock-Solid Retirement Plan

Consider that you have a married couple, both age 55, who are looking to you for advice on their withdrawal strategy. They want to know how they maintain or exceed their standard of living in retirement and the best way to make use of their available sources of income. They have $650,000 in liquid or near liquid investments and another $275,000 in qualified retirement plans. They currently have $6,250 in after-tax monthly income. After running some calculations, you project that if they claim Social Security at the full retirement age of 66 their retirement assets will be running low by age 90 and completely dried up by age 95.

While at first glance this situation appears to be safe, it may be cutting it too close for comfort. If you consider a 65-year old married couple, there is a 50% chance one spouse will live to age 92 and a 25% chance one will live until age 97. Centenarians are the fastest growing age segment in the United States. And while no one can say for certain if your clients will live well into their hundreds, they should not have to worry whether or not they are going to outlive their financial resources.

In order to resolve this issue, this couple could invest $350,000 into two specialized annuities at age 55 with a 10-year deferral. The first would be a five-year period-certain DIA that is funded with $150,000. This would “turn on” at age 66 and provide income through age 70. With its signature FIBO® (First In/Blend Out) tax treatment, only a portion of each payout would be considered interest while the rest would be considered return of principal. As a result, up to 95% of each payout may be exempt from taxation until basis is recovered. The other investment would be a fixed index annuity with a FIFO™ (First In/First Out) withdrawal feature that would be funded with the remaining $200,000. This is a new feature available on select annuity products that allows policyholders to delay all tax liability until 100% of basis is first recovered.


Since the replacement income for Social Security is almost entirely tax free, the couple could then begin converting some of their pre-tax qualified money to after-tax ROTH money using a Roth conversion. At age 70½, the couple will be forced to take RMDs (required minimum distributions) from their traditional IRA and pay taxes on the withdrawals. By converting some of those dollars now, the couple reduces their taxable income and maintains a lower tax bracket for life because of the lower RMDs.

All together this strategy can quite literally transform the couple’s retirement. Under the first situation, running their retirement projections to age 90, the couple would have $555,000 left in assets and would run out of money in the next five years. Additionally, they would have paid $133,000 toward taxes while receiving $2.1 million from their Social Security benefits. However, using the bridge strategy and the power of the FIFO-FIA and FIBO-DIA, their net worth at age 90 would be $1.7 million! They would have limited their taxes to $98,000 ($35,000 less) and grossed $2.5 million ($400,000 more) in Social Security benefits.

The amazing fact is that the longer the couple lives, the greater the impact of the new bridge strategy. If both spouses lived to age 95, their assets wouldn’t have drained away as they did in the first strategy. In fact, their money would be growing and they’d have accumulated just under $2 million! While it may seem farfetched to consider both spouses living to age 95, remember that running out of money isn’t about the day you run out of money, it’s about all the years leading up to it where you’re filled with doubt and worry. By using these two powerful specialized annuities, you can help your clients maximize their Social Security income, lower taxes, minimize the strain on their other financial resources, and eliminate their number one retirement worry — running out of money!

© 2014 Curtis Cloke. All Rights Reserved.

Curtis Cloke, CLTC, LUTCF, award-winning financial professional, speaker, and author, is an early pioneer and advocate for deferred income annuities (DIA). His contribution toward the discovery, development, and delivery of the power of the DIA has been widely acknowledged and embraced as part of the retirement income puzzle by the financial industry. Curtis is the founder and developer of Thrive Income Distribution System launched in 2009, which helps advisors and clients create more income utilizing less of the client’s portfolio. To learn more, visit or

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