Income annuities have a friend in nationally known personal finance expert Jane Bryant Quinn. Advisors should “strongly consider” recommending single premium immediate annuities (SPIAs) and/or deferred income annuities (DIAs) for a portion of clients’ long-term retirement savings, she said in an interview.
Such annuities can ensure income for life that is in addition to funds a consumer may have from Social Security and a pension. The annuities are like “a back-up against the risk of outliving one’s savings,” she said.
Quinn has spent decades as a financial advice columnist for several national publication, and she is the author of a number of books.
A SPIA is a fixed income annuity that starts paying a guaranteed income stream within the first 13 months of purchase. A DIA is a fixed income annuity that starts paying a guaranteed income stream sometime after 13 months and perhaps even several years from policy purchase.
The candidates for these products are people who have money in short-, intermediate- and long-term investments, said Quinn, who is a financial columnist for the AARP Bulletin. If these consumers need guaranteed income in retirement, in addition to what they get from Social Security and pension (if they have a pension), advisors should talk with the client about allocating a portion of the longer-term funds to a SPIA or DIA for that purpose, she said. This approach will leave the rest of the invested assets to grow, and to be available to meet major expenses, legacy goals or other needs.
However, consumers who have just a small amount of savings in addition to Social Security and pension are not good candidates for SPIAs and DIAs, she said. “Those individuals might need their savings accounts for emergency expenses in retirement.”
Ideally, the potential buyer should be in good health, with a “reasonable chance” of meeting their life expectancy, she added. Such individuals will likely need, and benefit from, guaranteed income for many years. By comparison, people in poor health shouldn’t have their savings “tied up in an annuity, because they may need to use those funds to cover health care or other big expenses.”
Quinn finds a lot to like in SPIAs and DIAs.
Simplicity. A major advantage is that the products are easy to understand, she said. In recent years, many advisors have been using variable annuities with guaranteed lifetime income features to meet the need for additional guaranteed retirement income, Quinn noted. However, she considers the variable products to be too complicated for most consumers — and some advisors — to understand. In addition, the variable annuity guarantee imposes limitations on which investments the consumer can use.
They have inflation options. For annuity customers in their 60s, purchasing an income annuity with an inflation option attached is a good idea, Quinn said. If a customer buys a DIA to start income in 10 years or later, for example, having a payout that adjusts for inflation could be an effective way to keep up with cost of living. “But at the older ages, say someone in the 70s who buys a SPIA, that’s not so important,” she said.
The products have options. Some of these address what Quinn calls the “sucker factor,” which is a term she uses to refer to consumer concern about dying shortly after buying a SPIA purchase or before receiving all the income benefits. The “sucker” concern is that the insurer will keep the remaining funds. Quinn pointed out that income annuities have features that mitigate that concern. The “period certain” opinions in SPIAs are an example. If the annuitant dies before the end of the stated period, the beneficiary gets the remaining payouts for the period certain. There are also joint and survivor options.
Actually, Quinn thinks the sucker factor is not a bad thing for consumers. It’s what makes annuities attractive, she said, because it enables the insurance company to pay out more in monthly benefits than people could prudently draw out in personal investments.
Furthermore, if the annuitant of a lifetime payout annuity dies shortly after policy issue and the associated funds revert to the insurer, that’s still good for the consumer, she said, because the “policy did what you wanted it to do when you were alive.”
DIAs can support flexibility in retirement planning. The example Quinn gave is a 50-year-old who takes out a DIA that will start making payouts at age 60, when the client wants to retire. At that time, the annuitant lives on the DIA payouts plus withdrawals from other assets. Then, at age 70, the client begins taking Social Security, when the Social Security payouts are at their maximum. Alternatively, a retirement plan could call for the client to take 4 percent withdrawals from existing assets for retirement income, but also to use a DIA to ensure the person has a little more than 4 percent coming in each months as well, regardless of market conditions, Quinn said.
Use the products to fill a life insurance or Social Security gap. When a spouse dies, the survivor may be left with inadequate life insurance funds or no life insurance at all, Quinn said. In addition, the survivor now has one less Social Security check to rely upon. Couples who see this exposure late and/or can’t qualify for life insurance can still do some planning around this exposure, she said. They could set up a joint life DIA that will start payments in 10 years or at some other agreed upon time to help fill the gap. Or each spouse or the spouse most likely to live longer could set up a DIA to start payments at a certain time.
Cost considerations. SPIAs and DIAs are less costly, in terms of policy features and fees, than variable annuities with lifetime income options, Quinn said. For some customers, that will be an important consideration. In addition, if a consumer consults a fee-based planner for advice on these products or the retirement income plan, the planner can look around for low-load versions of SPIAs; some are available, Quinn said.
Uncertainties accompany retirement income planning in general, and that includes the use of SPIAs and DIAs. For instance, some customers will likely try to assess the income annuity products by themselves, using online resources, Quinn said. Others will seek in-person advice from a planner or advisor, either for plan set-up or for set-up plus ongoing oversight.
Where the consumer goes for guidance will depend on the consumer’s confidence in the advisor, she said. In addition, the implementation and effectiveness of the resulting plan “will depend on the quality of the plan and the planner.”
These are uncertainties that consumers and advisors will confront. But although no one knows what will happen, Quinn believes that, where SPIAs and DIAs are concerned, these are products that will help preserve a consumer’s options.
How golden are the early retirement years, ages 66 to 75, she asks in her book, Making the Most of Your Retirement Now. The answer: “As rich as your pension, Social Security and the income from the money you saved.”
© Entire contents copyright 2014 by InsuranceNewsNet.com Inc. All rights reserved. No part of this article may be reprinted without the expressed written consent from InsuranceNewsNet.com.