Agents and advisors have numerous retirement income tools and solutions to consider when structuring a guaranteed monthly income stream for clients. The question is, which products to use and how much to allocate to each one?
It is a question that experts at CANNEX have been pondering, especially in light of the arrival of newer options such as deferred income annuities (DIAs), qualifying longevity annuity contracts (QLACs) and newly designed guaranteed lifetime withdrawal benefit (GLWBs) options.
DIAs have been available for only a few years, but roughly 15 carriers are now in the market. Owners of these products can delay income for several years from date of purchase. In 2014, DIA sales experienced record growth in 2014 with total sales of $2.7 billion, up 22 percent from 2013, according to LIMRA.
The QLACs began hitting the market this year. Their debut followed the July 2014 U.S. Treasury ruling allowing their use within 401(k)s and individual retirement accounts. The rules allow qualified plan owners to divert some of their qualified assets into a QLAC, which is a type of DIA, up until age 85. Seven carriers already have rolled out QLACs.
GLWBs have been available in variable annuities for several years. But, more recently, many fixed index annuities have been offering GLWBs as well.
Those retirement products join guaranteed income standbys such as single-premium immediate annuities (SPIAs) and annuitization of deferred annuity assets.
Also on the retirement product list are investment-modeling strategies, systematic withdrawal approaches, and a variety of other income solutions, simulations and calculations. Although these other approaches don’t guarantee a specific income, advisors often coordinate their use with a client’s Social Security, pension and other guaranteed income sources.
The question for advisors has become how to allocate assets among these possible options, Gary Baker, president of CANNEX USA, told AnnuityNews.
With the DIA and QLAC products in particular, the question is how to use the products for the longevity exposure and in what proportion, he said. A related question is how to explain the ways in which they work in the guaranteed income portion of the portfolio.
Baker provided insight into some of the considerations that advisors are thinking about.
“We know that the average age of people buying a SPIA in the U.S. is age 69 or 70, for both men and women,” Baker said, pointing to data from the CANNEX Financial Exchange. The exchange is an online database for advisors and distributors who are researching various SPIA options for clients.
“We also know that most people want to start income immediately after purchasing a SPIA,” he said. They often coordinate the SPIA income with the start of required minimum distributions (RMDs), he added. RMDs are the required minimum amounts that qualified retirement plan owners must start taking at age 70½.
But the longevity products, such as DIAs, can enhance and complicate the planning picture. For DIAs, the average age of purchase is the mid-50s, Baker explained. That’s based on advisor hits to about 10 DIAs in the CANNEX database.
The average deferral period (from purchase for a DIA to the start of income from that DIA) is five to 10 years, he added. These purchases often correlate to the start of retirement, but not necessarily with the start of RMDs.
As for QLACs, they are so new that the database does not yet reflect trends on product use. However, since the QLAC buyer can defer income up to age 85, the endpoint already is known. So is the maximum amount. According to government rules, it is $125,000 or 25 percent of the person’s total qualified account value. But averages on income start date, customer demographics and premium elected remain question marks for now.
“As a practical reality, not a lot of people will want to buy a QLAC and defer income for such a long time,” Baker predicted. “We’re hearing the QLAC is more applicable to the higher-net-worth person who can accommodate the long tail and who has the luxury of being able to defer income for such a long time.”
Still, agents and advisors will be working with such individuals, so QLAC will be among the products that will be on the table. That brings the discussion back to how advisors can develop allocation recommendations among the various available options.
One way to approach this
CANNEX believes one solution is to take a product allocation approach to income planning. For assistance, advisors might use professional allocation support services or request tools and support from distributors and carriers.
Either way, advisors will need to check to be sure the services reflect today’s expanded retirement income universe. CANNEX’s own product allocation service is a case in point. Called Product Allocation for Retirement Income, it debuted in 2008 as an offering from well-known retirement income researcher Moshe Milevsky and his QWeMA group (now owned by CANNEX).
The service has had to update with the times, Baker said. For example, the latest version now supports not only traditional guaranteed income products like SPIAs but also QLACs, DIAs, new types of GLBs (such as GLWBs on not only variable annuities but also fixed index annuities), fixed income and equity investments and pension analysis.
It’s the constant evolution of retirement income products that is driving this, he noted. Advisors are looking for ways to generate optimal allocations between annuities, investments and other products with the focus on income sustainability, and considering Social Security, pension, currently owned annuities and other areas in the retirement income mix.
Where annuities are concerned, the advisor’s final recommendations may end up suggesting allocations to one, two or three annuity products, or none at all. But Baker’s point is that advisors will need to explore what’s out there before deciding.
AnnuityNews Editor-at-Large Linda Koco, MBA, specializes in life insurance, annuities and income planning. Linda can be reached at email@example.com.
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