Measured Up: Defining Key Metrics for Retirement Success

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Peter Drucker, hailed by BusinessWeek as “The man who invented management,” once said, “What gets measured gets managed.” While he certainly meant this in the context of business planning, it’s 100 percent true for retirement planning as well.

The foundation for a secure retirement plan is only as good as the key factors that are used to measure it, and not everything is always as it seems. For instance, while saving for retirement, one key factor investors often focus on is average returns. Yet, in retirement, average returns don’t even apply because of “sequence of return” impact on distributions. Instead, it’s the order of the returns that can have a far greater influence and must be carefully considered.

For example, compare two investors who both start with identical retirement balances of $500,000. Let’s say that over a 30-year period, they both average six percent average annual net returns for qualified assets and three percent for NQ assets. Both investors make equal annual withdrawals that increase each year for inflation of three percent. However, math and science will show that an investor, who starts off his retirement strong, with the larger returns in the beginning, has a much higher probability to thrive throughout retirement. An investor who experiences big losses early is far more likely to run out of money.

Traditional retirement planning, and much of the research on it today, is well intended but often missing key pieces that have real-world impact. These include optimal ways to deal with fee-drag, taxes and inflation. While these elements will have a large impact on retirees, they are not as obvious when looking at rate of return. In retirement, it’s not just about how much you make, but more importantly, how much you keep.

Advisors and their clients need to carefully consider how they measure the success of their retirement plan. By comparing a traditional systematic withdrawal income plan (SWIP) model to what we call a guaranteed retirement income floor (GRIF) model, it’s easy to see how a few small changes can make a big difference. In many cases, the GRIF model can dramatically outperform other retirement models in this area.

With this in mind, key metrics that advisors should pay careful attention to when planning are distribution rates of invested assets, the Reliability of Income (ROI™ Factor), total taxes paid, total Social Security received, and net assets available for heirs. To understand how to analyze these metrics, consider the following case study:

  • Married couple, both age 56
  • Both spouses will retire at 66
  • PIA (Primary Insurance Amount – Social Security benefit at normal retirement age, currently 66) is $1,866 for both spouses and they will begin to collect at age of 66
  • Desired monthly after tax income is $6,250
  • We will assume a three percent inflation rate and a 29-year retirement span for the last surviving spouse

Also, consider that they have $500,000 in non-qualified assets that will grow at three percent, as well as $275,000 in retirement plan assets that grow at six percent. These, of course, are not guaranteed rates of growth, but are projected for the sake of simplicity of this case study.

Using this projection, the married couple will have about $88,000 dollars left at the end of their retirement at age 95 (see Figure A). While many advisors and clients would be happy with this solution since the assets are projected to last their lifetime, considering an alternative that fully leverages sources of guaranteed income can potentially produce a far greater outcome under our defined metrics. We can use a multifaceted strategy that boosts the amount of guaranteed income by shifting to annuities and deferring Social Security until age 70, while reducing future taxes by converting traditional retirement plan assets to a Roth.

Using the same facts of the original case, imagine that we make two changes to the current plan:

1. We invest $150,000 of the non-qualified assets into a 10-year delayed, 5-year period certain annuity. This income will turn on at age 66 and have a 90 percent exclusion ratio, or what I call First In/Blend Out (FIBO®) tax treatment.

2. We will also invest $200,000 of the non-qualified assets into a fixed indexed annuity that has a First In/First Out (FIFO) tax treatment. This means that all the initial payouts come from the basis, or principal, of the investment. The taxes don’t begin until the investors have exhausted the principal and begin to withdraw the gains. This will generate approximately $11,000 of income for the rest of the couple’s life.

Figure B: Overview of GRIF Strategy: Building a Bridge to Social Security and Beyond

  • FIBO Deferred Income Annuity (10-year deferral, 5-year payout): $150,000
  • FIFO Fixed Index Annuity (10-year deferral, lifetime payout):       $200,000
  • Roth Conversions from age 65-69: $100,000

Use a specialized tax strategy provided by insurance based products that utilize a blend of tax-exclusion ratio and FIFO (First In/First Out) tax treatment allocations of non-qualified assets. The purpose of this strategy is to create a five-year income bridge for Social Security delay strategies (such as file and suspend with a spousal restricted filing) that also preserves a large portion of the tax-bracket capacity (up to the top of the 15 percent bracket).

Create an opportunity for maximizing Roth conversions prior to age 70½, when required minimum distributions would begin.

Using the GRIF Strategy, the couple has created a Social Security bridge of income that will allow them to meet their income requirements from age 66 to 70 and maximize their Social Security by deferring until age 70. Additionally, because of the special tax treatment of the annuities, they are able to create an artificially low period of taxation on income. Reducing tax rates (“bracket bumping”) provide the retirees with the opportunity for an additional benefit: Roth conversion.

During the period between ages 65 to 69, they can convert $100,000 of pre-tax dollars annually that are in a traditional IRA/401k to after-tax dollars using a Roth conversion. This approach would require them to use some of non-qualified assets from the portfolio to be distributed to cover the tax. Finally, the shift to annuities will reduce the impact of fee-drag on their investments.

While certainly this alternative strategy is more complicated than the traditional SWIP model, the results are meaningful. Comparing the two plans side by side, consider the following measurements.

Using the GRIF model, we were able to dramatically lower the average retirement distribution, increase their reliable income to 76 percent of their required retirement income, and increase their Social Security by over $600,000. Best of all, we’ve increased the assets that are net to heirs to roughly $1.8 million, more than a 20 fold increase over the original SWIP plan. This is an incredible difference!

Figure C: Core Efficiency of SWIP vs. GRIF  (until age 95)

On a final note, I’d like to introduce one last measurement for retirement success: the Return of Life Factor™. With so much turmoil going on in the stock markets and economy, I’d argue that this is perhaps the most important of them all.

Advisors have to consider the emotional benefits that come from having a floor of guaranteed retirement income. Research has shown that retirees with guaranteed income are happier. Knowing their basic expenses are covered frees up the remaining assets to be invested for unfettered growth or legacy goals. Best of all, it can reduce their worries in retirement and allow them to truly enjoy their golden years.

© 2015 Curtis Cloke. All Rights Reserved.

Annuity Outlook Inc. and its representatives do not give tax or legal advice. The information contained in this article is not intended to serve as tax or legal advice and is not intended to provide financial or legal advice and does not address individual circumstances. This information should not be used to avoid tax penalties or to promote, market, or recommend any tax plan or arrangement. The information should not be used or relied upon for the purpose of avoiding IRS penalties. Encourage your clients to consult their tax advisor or attorney.

This article is intended to provide information, but not advice related to Social Security benefits. Clients should seek guidance from the Social Security Administration regarding their particular situation. Social Security payout rates can and will change at the sole discretion of the Social Security Administration. For more information, please direct your clients to a local Social Security Administration office, or visit; Information and contributors within are are not affiliated with or endorsed by any governmental agency.

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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