Offer the perfect hedge with SPIAs

By Joseph Bellersen

Qualified Annuity Services


For years, the "modern portfolio theory" has been extolled for its virtues. The argument that you "always do better in the market" no longer holds. In fact, it hasn't held for the past 10 years. Seldom questioned is the notion that all retirees fare well by being market investors. I dare say we might find more than a few disgruntled retirees. In spite of this fantasy, brokers/financial planners loath the argument to annuitize even a portion of retirement assets. The irrational argument continues: "You always do better in the market." Brokers and financial planners argue that it's always better to take a lump-sum distribution when a pension plan terminates or when/if the option is available from such plans at retirement. I submit that the argument is persuaded by two factors: 1) the desire to "control your destiny," and 2) the opportunity for advisors to earn fees on assets under management while they "always do better in the market." So, the questions continue to arise:

Can today's retirees afford retirement?

One way to measure this is to ask a simple question: "Now that you've retired, where do you plan on working?"

Seems a bit odd to call this a retirement plan.

Can retirees better afford retirement in 2009 than in 2008?

As the market begins to bottom, is a retiree who is dependent upon assets instead of income able to invest with confidence?

We think at least a few retirees have changed their views that a secure retirement is defined by the "never ending growth of assets."

SPIA sales have grown significantly in the past years. This may be the beginning of a new period of sensibility as opposed to exuberance. SPIA products deliver longevity insurance. SPIA products also provide a private form of pension -- which planners argue should be forfeit when available from a defined-benefit plan. So, we wonder:
    Is there irony in the retiree's actions compared to a planner's advice? Or is it something more serious, such as an ignorance of the facts?

    If it is ignorance, is it with prejudice? If it is with prejudice, is it something more serious, such as conflicts of interest?
As retirement assets fluctuate, retirees feel a need for a more secure base-line income. It's actually quite easy to understand why a growing number of individuals would opt for such a plan. While planners and brokers seek ways to manage assets, retirees may be thinking: "How can I be sure that my income is secure during retirement?"

Hedged retirement

The value to the lifetime SPIA proposition delivers the security and comfort of knowing that checks will be received for life. This auto-pilot form of retirement income is ideal for long-range planning. When an income is arranged with a lifetime SPIA, more market risk can be taken with other savings and investments. In this way a retiree has created their own hedge position: regardless of the future performance of the equity portfolio, the lifetime SPIA just keeps paying. A hedged income allows more freedom of investment. Thus, a longer investment horizon can be established for other equity assets, whether personal or tax advantaged in an IRA.

Portfolio recovery insurance

Given market volatility, distributions from IRA accounts may also become volatile. Taking a portion of IRA assets to purchase a lifetime SPIA will help to stabilize income, minimize income and tax volatility, and secure a retirement income plan. If a retiree is younger than the mandatory distribution age, then personal assets can be used to position a lifetime SPIA with very favorable income tax advantages. This efficient use of personal assets can help by allowing more time for "portfolio repair" as equity assets recover over time. An IRA portfolio can be invested with a longer time horizon if the withdrawals can be minimized due to the use of the lifetime SPIA to deliver the needed cash flows during retirement. In fact, the same principle can be applied to a retirement income supported mostly by IRA assets.

What's the point?

SPIA planning is too often a reaction to a retiree request. In reality, the typical retiree is likely to be very interested in a private pension or lifetime income. While each of these terms might describe what a lifetime SPIA does, a lifetime SPIA can function as a perfectly hedged income portfolio that contains longevity insurance. As a package of features, a lifetime SPIA is difficult to mimic and impossible to replicate efficiently.

A lifetime SPIA can do a great deal for a retiree. A lifetime SPIA can stabilize a damaged retirement income plan that was asset based. It can buy time with peace of mind. In this way, a lifetime SPIA can become a private pension tool or a perfectly hedged income plan. With proper planning, a lifetime SPIA can boost the likelihood of repairing a damaged asset portfolio that is allocated to retirement.

What have we learned?

We highlight the lifetime SPIA characteristics. In addition, we think of SPIA products as packaged hedge programs with protection. Lifetime SPIA products aren't mysterious. They are straightforward and they work.

Lifetime SPIA products are loaded with deliverables. And retirement security is where they begin.

Get informed. Stay tuned. Rate commentary:
Spread Analyzer results for The Bellersen TEq Yield Power IndexJ 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
MaleNovemberDecember ChangeT BondTSpread

* QAS SPIA Rate Database B May-June, 2008
** Yahoo! Finance - Bonds B Apr, 2008

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