For those who now believe that decumulation planning is at hand, “Where were you when underlying interest rates on SPIAs were north of seven or eight percent?” For more than two decades, higher interest rates underlying SPIAs were extremely favorable compared to today. However, I recall hearing why SPIAs were such a bad idea: “The market always goes up.” You don’t say? And now, with bond interest rates at all time lows, SPIAs provide the perfect cash flow hedged for retirement income.
Decumulation means different things to different people. To some, it means selling a deferred annuity, whether in fixed, indexed or variable annuity form. Brokers tend to want to keep the money working much like asset based fee planners and advisors. The message played over and over continues to be: “Whatever you do, don’t annuitize.” Much of this is driven by self interest in commissions, and not by meeting client needs.
The failure of asset linked retirement income plans
This subheading is nearly identical to the title of my October 2, 2007 article, The perils of asset-linked retirement security
However, I’ve inserted the word “income” for a reason: Clients need help with income planning, not asset and wealth accumulation. Any income plan must, as its first principle, meet the income needs of the retiree and not some abstract theoretical future asset value which is purported to be available for withdrawals. Failing to meet the income needs standard first puts retirement at risk for many retirees.
We find no fault with no fault retirement security
Many retirees had no choice but to accept a monthly retirement income check from a defined benefit pension plan at retirement. Those retirees are likely to be the ones breathing a sigh of relief today. For others who had the option to take a lump sum, sadly, a market risk penalty has likely been assessed and their retirement income prospects have been substantially marked down. The failure of asset linked income plans is that they depend upon two very risky components:
1) The need for systematic withdrawals of principal over time;
2) Presumption that continuous increases in future asset values will overtake and replenish the systematic withdrawals.
These risks are a disconnect that ignores the reality of the markets. It is tragic that so many retirement dreams have been shattered by such assumptions. This includes that home thing that “always” goes up in value.
Financial stress has caused professionals to look for non-traditional solutions that were there all the time, such as SPIAs. There is still huge resistance to the idea of “annuitization,” but that resistance is normally from brokers and advisors and not necessarily by the general public. Market share for SPIAs is shifting to carriers who have carved niche relationships and provided innovation such as tail coverage for retirement plan accounts.
So, where’s the swap?
Swap opportunities exist with SPIAs. In today’s market, the retirement income answer comes in many forms, mostly deferred annuity plans with minimum withdrawal provisions as mentioned. Fee paid advisors continue, at all cost, to resist allowing or recommending a client to “annuitize”. They argue for retaining assets, using the scare tactic of a potential loss on death shortly after annuitization. The availability of refund provisions is conveniently ignored. SPIAs offer systematic decumulation with a benefit: If clients live beyond their life expectancy, the SPIA keeps on paying. Said another way:
While there is a risk of loss on a SPIA due to early death, if an annuitant lives to age 100, the life insurer doesn’t ask for the money back with interest.
Swapping retirement assets for a SPIA to assure lifetime income protection is:
- An efficient way to insure against longevity risk
- A way to obtain a laddered bond portfolio with precision
- A way to obtain embedded tail coverage
- A way to secure monthly checks
- A way to minimize bond credit risk to the extent of the credit worthiness of the issuer
SPIAs can be established from high cost basis insurance cash values and deferred variable annuity plans that result in tax claw back advantages. Correctly structuring a managed variable payout annuity can overcome prior losses, while generating secure cash flows.
Decumulation is a fancy term for an old solution. Retirement income security is provided by defined benefit pensions and SPIAs. Professionals should objectively evaluate DB plan payout rates before recommending taking a lump sum. Many lump sums rolled to IRAs suffered losses that can never be recovered. If lifetime income solutions become available for 401(k) and IRA plans, this may result in a privatized Social Security alternative in stealth mode — one annuitant at a time.
Lifetime SPIAs have always been insurance in one form or fashion. SPIAs are the perfect decumulation vehicle to underpin a solid retirement income plan. It is time for the financial industry to answer their client needs for income.
Get informed. Stay tuned.
Spread Analyzer results for The Bellersen TEq Yield Power Index™ illustrate SPIA cash flows on a Taxable Equivalent Yield basis. This is a clear picture of SPIA yield power.
|The Bellersen TEq Yield Power IndexJ|
* QAS SPIA Rate Database Jul - Aug, 2010
** Yahoo! Finance - Bonds Aug, 2010