Most people worry about running out of money in retirement. In response, Charles Schwab launched Schwab Intelligent Income™ in 2020. The program promises monthly income from a regularly rebalanced portfolio of diversified ETFs plus a cash account. Participants pay no commissions or advisory fees. This is the newest strategy to generate retirement income.
In contrast, the income annuity is a strategy that has been around a long time. It provides a guaranteed income for a lifetime or a fixed term. An income annuity can offer deferred or immediate payments.
A single-premium immediate annuity, or SPIA, is a popular choice that starts paying income right away. How does it stack up against Schwab Intelligent Income? Each has its pros and cons, but I believe that the annuity comes out ahead overall. Since I make my living selling annuities via a long-established website, it’s not surprising I’d believe that, but as you’lI see, I have good reasons.
Comparing pros and cons
After running the numbers, the No. 1 advantage of an immediate annuity is that it will provide more income and is guaranteed to continue unchanged for your lifetime, no matter how long you live. The Schwab plan provides less income, and you have a significant risk of running out of money if you live to a very old age. I’ll get into the specifics of how much income each type of plan can be expected to generate with three examples below, but let’s examine some general pros and cons first.
The Schwab program does have some advantages. With the Schwab program, you retain control over your money and portfolio, unless you eventually exhaust your funds. With an immediate annuity, you turn over your money to an insurance company in exchange for a stream of guaranteed income. This type of annuity typically has no cash withdrawal value.
Schwab also provides more flexibility. You can choose your asset allocation anywhere from conservative, with very little in equities, to aggressive, with a larger percentage in equities. You may also start, stop or change the withdrawal amount.
Additionally, if markets do better than expected, you have the potential for long-term portfolio gains. There also might be some tax benefits via tax-loss harvesting and long-term capital gains. These potential benefits are difficult to quantify, however.
The Schwab program also has significant cons. Along with the potential for long-term gains, there’s the risk of short- and long-term downturns in the stock and bonds markets. Related to this is market-timing risk: investing your money just before a market downturn and then exacerbating the problem by continuing to take monthly withdrawals from a depleted portfolio. That could make …….