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GAO Eyes Income Options — Including Annuities

By
AnnuityNews

One of the challenges that agents and advisors face when presenting income annuities to clients is how to help customers understand what factors impact retirement income outcomes.

That is especially difficult for annuity producers who have previously focused on helping people accumulate assets through annuities or other products. How do they flip over to the income discussion? What to point out? How to make the issues clear to the customer? Would certain customers do better with a systematic withdrawal plan than an income annuity?

An increasing number of annuity carriers do provide educational information and online tools to help sort all this out.

The problem is, not all producers have access to those materials. In addition, some producers hesitate to rely on provider-supplied materials out of concern that the materials may promote only the carrier’s products or solutions. Others do use provider materials, but they also want to use materials from independent resources — to ensure a balanced perspective.

Some help from the GAO

A new report from the Government Accountability Office (GAO) might be of some help to agents and advisors who are wrestling with those issues.

The report includes a discussion — and an interactive graphic — that highlights the options consumers have when setting up an income plan. It also summarizes some of the factors that people need to consider.

The discussion is part of GAO's recent analysis of how various countries are handling “spend-down” options in defined contribution retirement plans, such as 401(k)s. The options covered in the report are lump sum (the most common form of payout from defined contribution retirement plans in the U.S., according to GAO), programed withdrawals (essentially, systematic withdrawals that start at a set percentage which can be changed later), and annuities.

The report defines annuities as “guaranteed payments that are normally secured through a contract with an insurance company for either a set period or for the participant's lifetime.” (In industry lingo, advisors tend to refer to such products as income annuities or deferred annuities that have been annuitized.)

Although the report focuses on income options for people in retirement plans, the comments about annuities have applicability to retail income annuities as well.

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For instance, the researchers point out that the amount of annuity payout a person receives can hinge on a number of factors, not just on the retirement nest egg a person has accumulated (minus fees) in a plan.

Other factors include the age when payouts begin, they write, noting that older people generally receive higher payments than younger people. In addition, gender is a factor because men in the U.S. typically receive higher payments than same-aged women because men tend to have shorter lifespans than women. Another factor is health, because certain health issues may qualify a person for higher payouts.

The impact of interest and other factors

But where the report really rings bells for advisors in the retail market is in the researchers’ discussion about the impact of interest rates, inflation and investment returns on the retirement income.

People face trade-offs when they choose an annuity, lump sum or programmed withdrawal spend-down option from a retirement plan, the researchers write. That’s because “no single option protects against all the various risks participants may encounter in retirement, such as longevity and inflation risk.”

So, as retirement approaches, people must weigh the strengths and shortcomings of each option against their own unique retirement needs, the GAO researchers contend. People “also need to consider their other sources of retirement income, including government benefits and personal savings.”

Advisors in the income planning market have probably thought and said many of the same things, perhaps a thousand times or more. But for those just moving into retirement income planning, the comments may serve as useful tips or reminders.

Income calculator

As noted above, GAO provides a free interactive graphic along with the report. It shows a simplified illustration of the points raised above, in both graphical and data format. Website visitors can use the model online and/or download it.

The web visitor can see the impact of age, investment rates, investment returns, and inflation on retirement income by clicking different tabs. The graphic also allows viewing of the underlying data in spreadsheet form.

From that page, visitors can also download a “retirement model,” which is like a calculator. This lets people enter their own choices for the retirement factors mentioned above — gender, age, account balance at retirement, and the spend-down options they are considering. They can also enter choices for level payment annuity, programed withdrawal percentage, and a monthly payment desired (such as $2,000 a month), and they can enter certain assumptions, such as interest rate at retirement, inflation rate and investment return.

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The model then computes the inflation-adjusted retirement income the entered numbers would produce. This appears in chart form. A person can change the variables originally entered and see how the changes would impact the projected income in the chart.

The model can be useful for illustration purposes, but GAO cautions that it does not represent specific quotes or rates from financial institutions, and that “conclusions drawn from the use of this tool should not be taken as an endorsement or financial advice about spend-down options.”

As for the annuity payouts, GAO says these reflect prices similar to those in the U.S. retail markets in July 2013, and that pricing for in-plan annuity options may vary.

The chart below provides a simplified example of what a chart from the retirement model might look like. This chart is taken from the GAO report. (The actual charts produced by the calculator vary by options selected, etc.)

GAO notes that the model does not take into account a person’s access to other sources of retirement income (such as Social Security and personal savings), and does not incorporate the tax considerations of the choices.

Income planning experts will find the output from the chart to be ill-suited for actual planning purposes. That is due to its simplicity and the absence of certain planning considerations. But for mere earthlings who have not even looked into income possibilities or who are not yet familiar with the issues to consider, the model and its charts could provide a starting point for meaningful thought and conversation.

As noted above, this the GAO material is aimed at people in defined contribution retirement plans. But the multiple factors the report highlights are pertinent to people in the retail market as well.

, MBA, is a contributing editor to AnnuityNews, specializing in life insurance, annuities and income planning. Linda may be reached at linda.koco@innfeedback.com.

© Entire contents copyright 2013 by InsuranceNewsNet.com Inc. All rights reserved. No part of this article may be reprinted without the expressed written consent from InsuranceNewsNet.com.

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