Make SPIAs a cornerstone of your practice
By Dick Duff
Editor’s Note: This series is based on Duff’s consumer-friendly book, “Retirement Breakthrough, the Safe, Secure Way to a Guaranteed Income You Can’t Outlive.” This article explains that by making SPIAs a cornerstone to your practice, you'll enjoy each day more and help more people. You’ll also make more money.
In his February 27th Wall Street Journal Sunday column, Tom Lauricella writes about retirement income planning. He mentions the opinions of Chris Jones with Financial Engines. They recommend “taking about 15 percent of the portfolio and buying an annuity,” the kind that “guarantees income for life but locks up your money.” They also suggest waiting until your early mid-70s to do so.
For years, I’ve enjoyed Mr. Lauricella’s views and columns on financial planning. This time, he has it wrong. He doesn’t understand the magnificent benefits of income annuities (We’ll call them SPIAs.) Let me explain.
At a book signing or income planning workshop, I ask an audience what counts most in a quality retirement income program. Out of 15 or 20 possibilities, they usually come up with “something that pays an income you can’t outlive.” They don’t want to run out of money someday, move in with kids or sponge off friends. Social Security and any pensions are their primary lifetime incomes. Sometimes there is a payout annuity. Call these “private security.” SPIAs are a best kept secret.
If a pension plan is underfunded, public workers will look to unions and politicians. In the private sector, a business gets the blame. Social Security could be even worse. It is plain unfunded. At best, it is backed with IOUs from ourselves, our children and grandchildren. On the other hand, SPIAs are bolstered by reserves and years of regulations. You will sleep well when an annuity check is in the mail. You’ll probably live longer too.
When you contrast SPIAs with equities it gets even more interesting.
You and I probably have serious money in the stock market. Is it there, however, because Wall Street says it should be? Is it there because there aren’t alternatives for growth? Is the stock market the answer? Perhaps, unless its expenses get to our money first. We also don’t want to be behind the curve and days late to invest.
Don’t get me wrong. I like the possibility of growth. A day goes better if the market has an uptick on CNBC. It’s just that SPIAs come first. These “perfect investments” are the primary choice. I don’t remember what I paid for mine. I just know the check really is in the mail.
There is more to this than an opportunity to grow some money. Stay with me. Fixed SPIAs have no direct costs, management fees or loads. You see what you get. Suppose a $100,000 policy pays $7,000 annually (end-of-year) for a flat 20 years. That’s a 3½ percent amortizing rate as $140,000 comes back. Similarly, a variable SPIAs first check could be $7,000. Then, its payments will change as the stock market shifts.
Let’s say a fixed SPIA pays back your money, plus 3½ percent to 4 percent net. That may not seem like much, but at least there aren’t any 1 percent to 5 percent charges before the check comes in.
An annuity income pays for fun, goods and services. It isn’t fragile. It is tsunami-proof. It comes on time, every time and follows you anywhere in the world. There will be fewer late charges and checks to write. There are no records to keep, management worries or unopened brokerage statements. You’ll have more time to inspire grandkids, take cruises and play golf, tennis and bridge.
Fixed annuity incomes are safe (Variable annuity incomes have safeguards, too). You can buy riders that track payments to inflation. There can be extra death benefits. You can even access your money. Everything has a fair price.
SPIAs are simple and will slow the urge to tap your money or cash in. There should be less need for advocates, agents, attorneys-in-fact, custodians, accountants or attorneys to handle the money. If there is a nursing home issue, the kids won’t need to get in the financial muddle and figure it out.
If things get tough, a SPIA may be all there is. There are no Ponzi schemes with a SPIA. A spendthrift clause protects the money with your carrier. States safeguard its present value if the insurer fails. SPIAs can be debtor friendly; states can shelter annuity income from foreclosures, lawsuits, creditors and bankruptcies. Overall protection may be better if payments are made to accounts for your support. There isn’t such safeguarding for mutual funds, stocks, real estate or gold. None at all.
You can combine SPIAs with life insurance, accumulation annuities and other investments that grow tax-deferred. Most of the annuity income is tax-free, and tax savings can be remarkable. You might even be more aggressive outside the annuity.
Assuredly, there are risks in a comprehensive retirement income program. Some are inflation, mortality, longevity, management, complexity, liquidity, market exposure, interest rates, timing, long term care needs, personal spending habits, depletion, taxes, claimants, predators, flexibility, adequacy of income and legacy shortfalls. Equities include most of these perils. SPIAs eliminate many of them. You can debate SPIAs and equities all day. There will always be agendas and perspectives. Everything is possible when you listen to the client and get creative. It’s just that SPIAs come first. The rest comes next.
Cash flows are the cornerstone to a rock solid income plan. Incomes will be key for a long time. SPIAs soften frustration. They allow us to relax and sensibly add layers to the plan. They are the new game in town.
A core monthly annuity income (at age 65) might be $100, $1,000, or even $10,000! Under current law, the taxable portion is levelized until about age 85. It is money in the bank compared to a self-amortizing plan where the payment is taxable interest-first.
Most annuitants should add a life contingency to a term certain payout. If a $100,000 SPIA pays $7,000 annually from age 66 to 85, a lifetime payment guarantee should cost about 10 percent. Think about it. For an extra $10,000, there is protection against living too long. Then, at age 105 after a 40th payment of $7,000, the amortizing rate would be well over 6 percent annually.
To sum up, it’s heartwarming to tell consumers about SPIAs and see smiles on their faces. Be the Income Lady or Gentleman in your area. Give workshops on “how not to run out of money.” Make SPIAs a cornerstone to your practice. You’ll enjoy each day more and help more people. You’ll also make more money.