Client Background
 

This case study explores the retirement planning strategy for a 61-year-old couple from Florida aiming to retire at 66. Their goal is to achieve a net, after-tax income of $12,000 per month ($144,000 annually) while ensuring a secure, tax-efficient inheritance for their four children and nine grandchildren. Key concerns for the couple include:
 

• Longevity risk: The potential of living longer than expected
   

• Market risk: The possibility of market downturns negatively impacting their portfolio
   

• Inflation: The erosion of purchasing power over time
   

• Tax-efficient inheritance: Minimizing tax burdens on their wealth when passed down to heirs
   

Current Assets
 

The couple’s current portfolio consists of the following assets:
 

• $1,843,000 in traditional 401(k)s/IRAs
   

• $691,000 in non-qualified joint brokerage accounts
   

• $112,000 in Roth accounts
   

• $74,000 in checking/savings
   

Total Assets: $1,843,000 + $691,000 + $112,000 + $74,000 = $2,720,000
 

Retirement Income Goal and Shortfall
 

The couple aims for a monthly after-tax income of $12,000, or $144,000 annually. With a 20% marginal tax bracket, they need to generate $15,000 per month (or $180,000 per year) in gross income to meet this target.

At retirement, their income sources will include:
 

• Social Security: $3,460/month for him and $1,730/month for her
   

• Pension: $814/month for him
   

Total income from Social Security and the pension amounts to $6,004/month ($3,460 + $1,730 + $814).

This leaves them with a monthly shortfall of $8,996 to reach their target of $15,000 per month in gross income.
 

ARIS Lifetime Income Portfolio Strategy
 

To address the couple’s concerns and meet their financial goals, the ARIS Lifetime Income Portfolio strategy focuses on providing secure, inflation-adjusted, and tax-efficient retirement income. The strategy is broken down into several key steps.
 

Step 1: Establish the Emergency Cash Position (ECP)
 

The couple’s total assets amount to $2,720,000. The ECP is set at 10% of the total portfolio, which equals $272,000. This amount will be reserved as an emergency fund, ensuring the couple has liquidity in case of unexpected expenses.
 

Step 2: Calculate the Recovery Leg
 

The couple desires a $5,000,000 tax-free recovery leg to fund a tax-efficient inheritance for their heirs.

Assuming an 8% annual return and a 24-year investment horizon, the present value of the required starting balance is calculated as follows:
 

• Future Value (FV) = $5,000,000
   

• Annual Return (r) = 8%
   

• Years (n) = 24
   

The formula used is:

PV=FV(1+r)nPV=(1+r)nFV​

PV = \frac{5,000,000}{(1 + 0.08)^{24}} = \frac{5,000,000}{6.848} = **$731,000**
 

Thus, the couple needs to allocate $731,000 from their existing assets to fund the recovery leg, which will grow over time to reach $5,000,000.
 

Step 3: Roth Conversion Strategy
 

To ensure the recovery leg is entirely funded with Roth assets, the couple must convert an additional $619,000 to Roth accounts over the next four years. This gradual conversion avoids significant jumps in tax brackets and minimizes increases in IRMAA (Income-Related Monthly Adjustment Amount) premiums.

The estimated cumulative tax liability for these conversions is approximately $144,000 over the four-year period. These conversion taxes will be covered by the couple’s emergency cash position.
 

Step 4: Halfway Point Summary
 

At this point, the couple’s asset allocation looks as follows:
 

• Emergency Cash Position (ECP): $272,000
   

• Roth Conversion Taxes: $144,000
   

• Recovery Leg: $731,000
   

These allocations total $1,147,000, leaving $1,573,000 available for the couple’s annuity ladder, which will generate the guaranteed lifetime income they need in retirement.
 

Step 5: Designing the Custom Annuity Ladder
 

With the critical components in place—emergency liquidity, Roth conversion funding, and the recovery leg set up—the next step is to focus on the annuity ladder. The remaining $1,573,000 will be used to build a customized annuity ladder, ensuring the couple’s income needs are met with security and inflation protection.

The annuity ladder is designed as follows:
 

• Leg 1: $1,258,000 (80% of remaining principal) — Deferred for 5 years (ages 61-66). This leg will provide $9,858/month of guaranteed joint lifetime income starting at age 66.
   

• Leg 2: $188,000 (12% of remaining principal) — Deferred for 10 years (ages 61-71). This leg will provide $2,334/month of guaranteed joint lifetime income starting at age 71.
   

• Leg 3: $125,000 (8% of remaining principal) — Deferred for 15 years (ages 61-76). This leg will provide $2,473/month of guaranteed joint lifetime income starting at age 76.
   

Each annuity leg activates over time, increasing the couple’s income by approximately 20% every 5 years, in line with an estimated 4% annual inflation adjustment. By age 85, the combined lifetime income from the annuities will significantly support their retirement needs, while the recovery leg continues to grow toward a $5,000,000 tax-free inheritance.

 

Summary of Stacked Income Streams (Including Pension & Social Security)
 

Stage 1 (Ages 66-70):

Income totals $15,862/month or $189,344/year. This is derived primarily from the first leg of the annuity ladder, supplemented by Social Security and pension income.
 

Stage 2 (Ages 71-75):

Income increases to $18,196/month or $218,352/year as the second leg of the annuity ladder activates.
 

Stage 3 (Ages 76-80):

Income rises again to $20,669/month or $248,028/year with the activation of the third leg of the annuity ladder.

The three stacked income streams ensure the couple’s income needs are fully met, with inflation protection built in as each annuity leg is activated.

 

Comparison Against Traditional Methods
 

The efficiency of the annuity ladder becomes apparent when compared to traditional income strategies.
 

1. The Annuity Ladder Approach:

The first leg of the ladder, starting with $1,258,000 of principal, provides $118,269/year of guaranteed joint lifetime income after 5 years of deferral.
 

2. Interest-Only Strategy (5% Fixed Rate):

If the couple were to invest the same $1,258,000 using a 5% interest-only strategy, the income after 5 years would be only $80,278/year.
 

3. Market-Based Strategy (8% Growth, 4% Withdrawal Rule):

Under an 8% annual growth scenario with a 4% withdrawal rate, the income generated after 5 years would be $73,895/year.
 

Income Comparison:
 

• The annuity ladder produces 47.32% more income than the interest-only strategy and 60.03% more income than the market-based strategy.
   

Additional Principal Required to Match Annuity Solution:
 

• To generate the same income as the annuity ladder with an interest-only strategy, the couple would need $595,000 more in principal.
   

• To match the annuity ladder’s income with a market-based strategy, they would need $754,267 more in principal.
  
   

1st Case Study Conclusion: The Advantages of the Custom Annuity Ladder Approach

This custom-designed annuity ladder offers significant advantages:
 

• Less Principal Required: The annuity strategy requires considerably less principal than both the interest-only strategy and the market-based strategy to generate the same level of income.
   

• Eliminating Investment Risks from Cash Flow: The annuity ladder eliminates downside market risk and sequence of return risk from the income-generating portion of the portfolio.
   

• Inflation Protection: With the step-up stacking income each time a new leg of the annuity ladder is activated, the strategy provides natural inflation protection, ensuring that the couple’s income grows over time.
   

• Tax-Free Inheritance: By strategically converting assets into Roth IRAs and funding the Recovery Leg, the couple can pass on $5 million in tax-free capital to their heirs, preserving their legacy.
   

• Efficient Use of Capital: The annuity ladder strategy optimizes the use of the couple’s assets, solving 100% of their lifetime income needs with only 58% of their total nest egg dedicated to annuities, while the remaining assets continue to grow and work toward their tax-free inheritance goal.
   

• Reduction of Overall Risk Exposure: With 68% of the portfolio making up the ECP and annuity ladder combined, we have effectively eliminated all downside market risk exposure from over two-thirds of their total portfolio. The only market risk remaining is self-contained within the 32% Recovery Leg allocation. Normal and expected market volatility within the Recovery Leg will now be that much easier to digest since the couple knows they have a solid lifetime income foundation already in place via the annuity ladder.
   

  By implementing this strategy, the couple can rest assured that their retirement income needs will be met, their risk exposure is minimized, and their legacy is preserved for future generations.