Some advisors are showing increased interest in using income annuities for a portion of their clients’ retirement income plans. But other advisors are wondering, just how does that work out?
Wade Pfau suggests that using income annuities in an “integrated approach” that also includes whole life insurance and investments may yield higher income and greater legacy wealth than an investment strategy combined with term life.
A PhD, CFA and well-known professor of retirement income at The American College for Financial Services, Wade proposed the use of an integrated approach in a white paper commissioned by OneAmerica.
The integrated approach “can create a more efficient retirement strategy,” he contended, adding that the markets would have to perform “extremely well” to beat this approach.
40 percent more income
That greater efficiency translates into more retirement income and more legacy value, according to the research. How much more?
One example Pfau cited involved a couple, each age 35. They have $65,000 in 401(k) savings and $15,000 available per year to invest for retirement (savings and insurance). Pfau ran Monte Carlo simulations to create a distribution of outcomes for the couple in three different scenarios.
In this case, the integrated option provided 40 percent more income at age 65, and 228 percent more legacy wealth at age 100 than an investments-and-term-insurance option. These were median numbers, reflecting what Pfau said are more typical outcomes.
The professor also ran simulations on an older couple, each age 50, with $625,000 in 401(k) savings and $32,000 set aside for savings and insurance. That produced similar median results. It found total income at age 65 was 45 percent greater for the integrated plan than for the investment-plus-term plan and that legacy wealth at age 100 was 451 percent greater.
In terms of actual dollars, the following is an example from the younger couple’s median outcome. It assumes partial annuitization from a single premium income annuity (SPIA) written on a single life. It also assumes a 7.74 percent payout for an amount equaling the whole life death benefit at age 65.
In this case, annuity income came to $57,122 across the distribution, Pfau wrote. A 3.5 percent withdrawal strategy applied to any remaining investment assets would generate additional income of $114 to $77,425. This would produce total retirement income at age 65 ranging from $57,236 to $134,547, with a median of $82,034, he said.
Findings like this might interest younger people who are planning for both retirement and life insurance needs, he indicated, explaining that younger individuals “may view whole life insurance in a new light as a powerful retirement income planning tool.”
As for middle-aged people, such as the 50-year-olds above, he made the point that age 50 is “not too late” to start implementing integrated planning techniques.
The three scenarios used in the research were:
- Investments-and-term-life insurance: This scenario uses a term life policy to meet life insurance needs until retirement, and otherwise draws retirement income with systematic withdrawals from an investment portfolio.
- Investments, joint and 100 percent survivor annuity and term life insurance: This scenario also uses term life insurance, but adds partial annuitization with a joint-life income annuity to provide income along with portfolio withdrawals from the remaining non-annuitized assets.
- Investments, single life annuity and whole life insurance: This scenario is the highly efficient “integrated” plan. It maintains a permanent death benefit with whole life insurance, and uses a single-life income annuity along with systematic withdrawals from the remaining non-annuitized assets for retirement income.
Retirement income planning is still a relatively new field, the professor allowed, noting there is a “rift” in the field about the best way to build a retirement income plan.
His take is that, “for retirement income, we must step away from the notion that either investments or insurance alone will best serve retirees. More emphasis is needed on the basic forms of insurance products, and how they may behave as part of an integrated retirement income plan.”
The research reinforces the importance of considering the full array of financial tools available for building a well-diversified retirement income portfolio, Nicolas E. Lance, vice president-retirement income strategies at OneAmerica, said in a statement. “Personal situations vary and there are many options for creating retirement income.”
He described the integrated approach as “one strategy that takes advantage of investments, provides guarantees and leaves a legacy for future generations.”
AnnuityNews Editor-at-Large Linda Koco, MBA, specializes in life insurance, annuities and income planning. Linda can be reached at [email protected].
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