SPIA does the heavy liftingArticle added by Joe Bellersen on December 16, 2008
Joseph Bellersen

Joe Bellersen

Joined: August 21, 2010

People are told that the SPIA does heavy lifting, but sometimes the message just doesn't get through. When that happens, I just try, try again. The SPIA is the most valuable retirement income planning tool in the market. Sadly, it is also the most unappreciated. Why? It is misunderstood by most of the public. It is not economical for the seller. It's inaccurately characterized by the professional.

These points are likely controversial. And their origins are the Wall Street world of "modern" finance. The ugly travesties we have witnessed need not have occurred, but they did. So many retirement plans and dreams have evaporated. It will take time to mend, and mend it will. This new view may reverberate: If clients have retired, their view of retirement asset growth has likely changed.

A SPIA solution provides income security and longevity insurance. It's boring; it's not newsworthy or noteworthy. There are no claims of trading on and out successfully. Lifetime-based SPIA contracts just keep paying. That's the beauty of it, and that's all the excitement you'll ever hear. SPIA owners likely exhibit a different state of mind: They probably aren't as worried about their retirement income.

The possible exception might be for those concerned about the solvency of their annuity provider. And worry they should, but only due to the lack of understanding about the life company solvency system and state guaranty fund operation.

Background

The advent of the retirement income revolution began with the creation of IRAs by ERISA. Suddenly, Wall Street and Main Street were engaged with dreams of wealth creation and secure retirement subsidized by the tax-deductible arrangements. The little observed adoption of administrative relief in the form of lump-sum distributions gave way to waves of asset transfers to IRA rollover accounts. The rest, as they say, is history.

Throughout the past 30 years, producers have witnessed the dismantling of 100,000 defined benefit plans. In its wake, tens of billions of dollars have been put to market risk by current and future retirees hoping to strike it rich (or richer). For many, retirement income security was heralded by market asset growth. Let the good times roll -- and they did.

Excess consumption threatens retirement security

As more retirees hit the ranks, fewer workers will contribute to Social Security. As the Pension Protection Act of 2006 gets into full swing, more defined benefit plans will be dismantled. As those plans terminate, there will be more disgorgement of funds. Unfortunately, those funds will not likely provide retirement income. They will instead be used to pay down debts, mortgages, credit cards and the like. The result? Greater reliance on Social Security as a retirement income plan will drive throngs of Americans to be grouped into a vastly larger, marginally secure retiree population.

SPIA as retirement security

Defined benefit pensions provide checks every month. Social Security does the same. Other savings and assets can act as a back-stop for large or unexpected needs. But a SPIA encompasses all the features of both a defined benefit pension and Social Security. In essence, a SPIA is a private pension, and it has tremendous advantages that are so simple, yet so elegant:
    1) Upside potential
    2) Systematic laddered bond fund
    3) Longevity protection that does not cease
    4) Cost of living CPI coverage available
    5) Legacy interests, if needed
    6) No volatility
    7) Secured by general account of insurer
    8) Generally provided with $100,000 present value state guaranty coverage
About that "upside potential"

I suspect that this will cause controversy; that's why it's the No. 1 feature. The upside potential of a SPIA is driven by the health of the annuitant. Should he/she live long, the reward is a higher return -- guaranteed. Certainly, there is a downside as well. If a life-only-based annuity is purchased and the annuitant dies, then a loss has been suffered. But that's why insurers offer cash or installment refunds.

Back to the upside potential, which is measured using The Bellersen CurveĀ®. It is possible to clearly see the "payoff" for a SPIA. So, I argue: If this message is clearly understood, rational choices for utilizing SPIA as a secure income vehicle would increase.



What's the point?

SPIA income planning can be dynamic and can be structured in an individual setting to maximize the value of the proposition. Absent these tools, planners focus on the competitiveness of one quote versus another. This misses the point and relegates the SPIA as a product of last resort. If the SPIA is purchased, the assets under management fall. When the assets under management (AUM) fall, so do ongoing fees. So, there is an agenda that is contrary to the utilization of a SPIA in retirement settings.

Summary

A SPIA is woefully underutilized by the financial community. It is more likely sold as a niche package product, and is generally sold without a lot of planning. The SPIA is so much more as the secure engine of retirement income and longevity insurance. It's boring. But it works.

We highlight the SPIA "upside potential." We argues that it's there. All you need to do is look to have it revealed. Asset pundits already understand that future results are not guaranteed. A 5.97 percent rate that is guaranteed regardless of market mayhem is quite attractive. But out-earning a SPIA takes some doing, especially since the longer it pays, the better it earns.

A SPIA is a workhorse. While pricing is tied to interest rates, once in place, a SPIA is on auto pilot: it just keeps paying, and paying and paying. Retirement income planning is made easier with an underlying SPIA. Lump-sum distributions from defined benefit plans can be a valuable place to start securing an income in retirement -- when available. DB options should not be strongly considered with a heavy-duty checkup from a knowledgeable planner.

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