SPIA Payouts Surge While Variable Annuity Income Riders Slide

As I have discussed over last two years, Income riders charges are up, payout factors down and most products produce less than a 1% IRR at average life expectancy.  
 
Income riders are falling even harder than I expected.  
 
According to LIMRA:
“One of the factors driving VA sales declines has been a drop in sales of products with guaranteed living benefit riders,” noted Giesing in a statement. “LIMRA Secure Retirement Institute is expecting sales of variable annuities with a GLB rider to be around $50 billion in 2016. This is a decrease of nearly $20 billion from last year and a drop of over 50 percent from just 5 years ago.”
 
It’s only a matter of time before the reality of income rider payouts hits the FIA world and the public stops buying secondary account features at a high cost to their heirs and a 50% chance of earning less than 1% over the life of their annuity due to high fees and charges. 
 
What can you do now? Gain insight, so you can make an informed decision. 
 
Income Under Management™ which uses a mathematically sound process to calculate systematic withdrawals and provide a SPIA estimate at a later age in the event a client wishes to purchase a guaranteed income stream at that point. The net effect results in an average increase of $100,000 in saved fees for not choosing an income rider and focusing on a low or no-fee accumulation product with a strong participation rate.
 
After AnnuityCheck™ updated SPIA rates for the month, a 65-year-old male would need $3,218 less to generate a $20,000 guaranteed income at age 83. $151,103 vs. $154,321 before the 1/4 % rate hike.  
 
Are all income riders evil? Absolutely not, but without knowing the numbers and the odds, you are in the dark. 

The Downside of Decumulation

The question isn’t at what age I want to retire, it’s at what income.
– GEORGE FOREMAN

In this article, we will share an approach that will expose the weakest links to the most common choices when purchasing an annuity and provide you with the knowledge to increase your client income by as much as 20-40% using a new decumulation strategy. This approach will preserve and protect accumulated value and provide significant flexibility. Determining the best withdrawal rate for retirement can be a daunting process, especially when faced with uncertainties, such as:

  • Unknowable Future Returns
  • Unknowable Life Expectancy
  • Unknowable Future Expenses

A good question to ask yourself when planning is:
What assumptions must prove to be true, in order for my plan to work?

Over the last twenty years, the traditional options to increase or even maintain a nice retirement income has narrowed substantially.

 

Decumulation Risks

It is a well-known fact that the descent is the most dangerous part of mountain climbing. The same is true with retirement income. There are two phases to your investment life, accumulation, and decumulation. The accumulation phase is more forgiving because the longer time frame helps to absorb the market volatility and downturns and is the period where you are working and saving for the future. During the decumulation phase there is much impacting your account and several years of vicious volatility or low returns can negatively impact your lifestyle if you don’t have the right approach. This second phase receives little attention from the financial industry because most firms are focused on keeping you fully invested and increasing their Assets Under Management.

In an effort to keep you fully invested in the market, the most publicized strategies for decumulation have revolved around managing the risk of a volatile market by reducing the withdrawal amount.

Popular Income Options

In this section, we are going to help you better understand the mathematical principles of the various options. We are not covering the interest only option, such as bank CD’s, because, in today’s low-interest-rate environment, it’s not viable for most retirees.

1: Withdrawals While Remaining Fully Invested in the Market

1994: The 4% Rule
William Bengen Co-Authored A Study With Morningstar, Inc. and Recommended A Withdrawal Rate of four Percent.

2013: The 2.8% Rule
Morningstar Revised the 4 Percent Rule Due To:

  • Volatile Markets
  • Low-Interest Rate Environment
  • A More Conservative Investment Mix

Remaining fully invested in the market, subjects’ retirement accounts to market swings creating a sequence of returns risk. If you withdraw income from a depleting account, you could magnify the losses and significantly reduce the income potential of the account.

2: Fixed Index Annuity with Guaranteed Income Rider

2005: The FIA Annuity
Prior to 2005, there were three types of annuities; Fixed or Variable for Growth, and Immediate Annuities for lifetime income. In 2005, the Fixed Index Annuity (FIA) made its way into the marketplace with multiple features such as returns linked to an index, and optional guaranteed income strategies. The primary benefits of the FIA are impressive:

  • Protect the Downside in Volatile Markets
  • Participate in Upside Market Growth
  • Provide an Optional Rider for *Guaranteed Lifetime Income

Protection from downside risk while still participating in the upside is the strongest reason for using an FIA. Unfortunately, many of the carriers have designed products with cap rates which limit the total upside potential of the contract to a percentage that they can move up or down. So, if your selected index earned six percent, but your cap rate was three percent, you would only earn the three percent for that period. We will come back and discuss the solution using our Income Under Management approach.

On the surface, the guaranteed income appears to be the perfect answer when combined with the growth and protection provided by the FIA contract, but as we will discuss in a future post, the real rate of return for Lifetime Guaranteed Income Riders are far less than the promotional material indicates.

Relevance of the Big Picture

One of my favorite ways to relax and reflect is by laying across our 16 ft trampoline with my kids and looking up at the night sky discussing the enormity of the universe. During these times, I can’t help but reflect on what we must look like from out there? One of my favorite authors is the late Carl Sagan.

Image

Taken in 1990 by NASA’s Voyager 1 spacecraft, the “pale blue dot” photo shows what our planet looks like from 4 billion miles away. Earth is the tiny speck of light indicated by the arrow and enlarged in the upper left-hand corner. The pale streak over Earth is an artifact of sunlight scattering in the camera’s optics

In his book Pale Blue Dot, astronomer Carl Sagan eloquently tried to express how he felt about this photo taken by The Voyager spacecraft 21 years ago as it left our galaxy:

Look again at that dot. That’s here. That’s home. That’s us. On it everyone you love, everyone you know, everyone you ever heard of, every human being who ever was, lived out their lives. The aggregate of our joy and suffering, thousands of confident religions, ideologies, and economic doctrines, every hunter and forager, every hero and coward, every creator and destroyer of civilization, every king and peasant, every young couple in love, every mother and father, hopeful child, inventor and explorer, every teacher of morals, every corrupt politician, every ‘superstar,’ every ‘supreme leader,’ every saint and sinner in the history of our species lived there — on a mote of dust suspended in a sunbeam.

Top 10 Quotes on Fear

Perspective enhancing quotes represent a condensation of knowledge and wisdom, the visible tip of the iceberg with an accumulated lifetime of observation beneath the surface. I often think of the words contained in the 10 quotes below whenever I need to gain some quick perspective on life.

“Live in the sunshine. Swim the sea. Drink the wild air.”
Ralph Waldo Emerson

“Take risks and you’ll get the payoffs. Learn from your mistakes until you succeed. It’s that simple.”
Bobby Flay

“Life shrinks or expands in proportion to one’s courage.”
Anais Nin

“Forget safety. Live where you fear to live. Destroy your reputation. Be notorious.”
Rumi

“Live dangerously and you live right.”
Goethe

“To transition we must enter a state in which we are no longer what we once were, and yet we are not who we must become. We have to be willing to stand in the open gap and momentarily risk being nothing.”
Secret Of Transitions

“I must not fear. Fear is the mind-killer. Fear is the little death that brings total obliteration. I will face my fear. I will permit it to pass over me and through me. And when it has gone past me I will turn to see fear’s path. Where the fear has gone there will be nothing. Only I will remain.”
Dune

“Security is mostly a superstition. It does not exist in nature nor do the children of man as a whole experience it. Avoiding danger is no safer in the long run than outright exposure. Life is either a daring adventure, or nothing at all.”
Helen Keller

“The proper function of man is to live, not to exist.”
Jack London

“Play the game for more than you can afford to lose… only then will you learn the game.”
Winston Churchill

“Don’t grieve. Anything you lose comes round in another form.”
Rumi