The “Secret Sauce” for a Higher Retirement Income

By Neil Godsey CFA®, CFP®, CLTC®
Miracle Mile Advisors

Sufficient income, guaranteed for life–sounds pretty good, doesn’t it?  Is there a better definition of “financial security” than that?  For many, financial sescurity is the Holy Grail of retirement planning, yet it’s increasingly elusive in today’s world of historically low bond and CD yields.  

Longevity risk–the risk of outliving one’s money–is perhaps the most critical retirement risk to address, as it magnifies the other retirement risks, such as market, reinvestment, tax, inflation and health-related risks.  Often, the simplest way to address longevity risk is with a financial tool that has been around for centuries, the tried-and-true lifetime income annuity. 

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Annuity contracts are sold by life insurance companies, which are uniquely positioned to pool the mortality risk of large numbers of people.  The payout is guaranteed by the claims-paying ability of the company, so investors should look to highly-rated companies for the most security. 

In its simplest form, an annuity provides the income recipient, or the “annuitant,” with a guaranteed stream of income for a guaranteed period of time, including for life, in exchange for an up-front investment with the insurance company. 

Payouts from income annuities can be immediate or deferred; the longer the deferral period, the higher the payout.  They can remain level or increase gradually to keep pace with inflation.  Payouts can be based on the lifespan of one person or multiple people, such as a husband and wife.  Each of these variables affects the payout amount.

Today’s annuity payout rates far exceed bond and CD yields and do so arguably at lower risk.  For example, assume a 70-year-old male has a $1 million portfolio to invest for retirement income.  An investment in five-year CDs today might generate annual income of $10,000-$15,000, while 10-year treasuries would generate $22,000 and high-grade corporate bonds would yield around $30,000. 

Thus, the retiree could expect to receive gross income of $10,000-$30,000 annually from his portfolio, depending on the investment mix.  Note, however, that this income would be taxable, and, assuming the retiree is using a financial advisor to manage the portfolio, some portion would be used to pay investment management fees.  Thus, the actual after-tax, net-of-fee income to the retiree would be substantially below the $10,000-$30,000 gross income.

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In contrast, a typical lifetime annuity with cash refund feature today would pay the retiree around $60,000-$65,000 annually, guaranteed for life, which is more than twice the payout from corporate bonds and three times treasuries. 

The majority of this income would be non-taxable until the basis had been returned, and there would be no management fees eating away at the payouts, so the payout versus bonds and CDs is even more favorable net of taxes and fees.

These much larger net payouts mean that the retiree could invest a much smaller amount in an annuity to generate the same amount of income as bonds and CDs.  Although the retiree typically would lose access to the invested capital once the payouts begin, he would be able to invest the remaining portfolio with maximum flexibility, as these surplus funds would not be needed to generate income.

Importantly, an annuity payout is not the same thing as interest paid on a CD or bond.  Annuity payouts are comprised of interest, the return of premium and a secret sauce, known as “mortality credits.”  A mortality credit is essentially the use of someone else’s money who may predecease you in the insurance company’s risk pool. 

These credits drive the outsized payout ratios and cannot be replicated by CDs and bond portfolios. Only annuities offer these valuable mortality credits, which is one reason many retirement income plans could be optimized by incorporating this proven financial tool.


Miracle Mile Advisors is a leader in providing independent investment advice through active indexing and customized financial planning to high net worth families and businesses nationwide.

As one of the fastest-growing independent registered investment advisors in Los Angeles, the firm is committed to developing tax-efficient portfolios that benefit from the lower cost and liquidity characteristics of Exchange Traded Funds (ETFs). To learn more about Miracle Mile Advisors, please visit

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