The longevity annuity: A big deal for retirees
With the recent Department of the Treasury and Internal Revenue Service ruling on the use of longevity annuities within qualified retirement plans, the income-guarantee industry arms race has officially begun.
For people that have 401ks and IRAs and would like to guarantee a lifetime income stream starting at a future date, the new longevity annuity rules are a game-changer. Before the ruling, a person with a 401k would have to transfer that money into a personal IRA, and then try to navigate the myriad financial products and services offered to solve for their specific income needs. Now, you can transfer that risk and contractually guarantee a future income stream within your 401k or IRA ( based on current guidelines ). That, my friends, is good news.
There have been many detailed articles concerning the recent ruling on longevity annuities, so let’s look at what this new provision actually means to you within the world of annuities.
Longevity annuity elevator speech
Longevity annuities are also called DIAs (Deferred Income Annuities), and are simplistic future pension guarantees. The structure is similar to a Single Premium Immediate Annuity (SPIA), which is sometimes referred to as an income annuity. Both DIAs and SPIAs have no annual fees and are simplistic transfer-of-risk strategies used for lifetime income, and very pro-customer in my opinion.
So the elevator speech for a longevity annuity can be summed up like this.
A longevity annuity (DIA) is a future pension plan that you can defer for as short as 2 years, and as long as 45 (depending on the carrier). The strategy guarantees a lifetime income stream, and annual increases to the income stream (i.e. COLAs) can be added at the time of application. There are no annual fees and no market attachments, and you can add your spouse to the lifetime income guarantee. Longevity annuities should be positioned beside your Social Security payments as another source for lifetime income.
Income rider monopoly is officially over
For the last 10 years or so, income riders attached to deferred annuity types like variable and indexed have dominated the income-later category. After the 2008 market volatility, the appeal of having some type of future income guarantee attached to a policy has fueled the over $200 billion of annuity sales that occur each year.
An income rider is an attached benefit that can be added to some deferred annuities to provide a separate calculation for future income guarantees. Riders typically have an annual fee for the life of the policy and a guaranteed growth percentage during the deferral years, and are flexible from the standpoint of when you decide to turn on the income stream.
History repeats itself again
We all know that consumers end up dictating how they want a product to work, look and function. The world of annuities is no different. In the financial world, we have all seen the complex be transformed into the simple and transparent. High-commission stock transactions of the past were replaced by the Schwab/E*TRADE model. High-commission mutual funds have been effectively challenged by the Vanguard/Fidelity low cost solutions. Mutual funds have been successfully challenged by exchange-traded funds (ETFs). Commission-only advisers continue to lose market share to the fee-only and fee-based models.
Now, complex variable and indexed annuity products with attached income riders are being challenged by the easy-to-understand longevity annuity strategy. History, once again, is both predictable and repetitive.
Income riders do have their place when product flexibility is needed, but the continuing rise in popularity of longevity annuities proves that consumers like simplistic and transparent strategies that can be easily understood and explained to and by anyone.
Unknown dark horse (aka: PIG)
Even though longevity annuities are commanding current headlines, and income riders dominate (for now) the target date income market share, there is another dark horse (pig) on the guaranteed income horizon.
If longevity annuities are the game-changer, then a new strategy I have personally deemed “The PIG,” is the killer app. The reason I call it The PIG is because it describes how the strategy works with an easy to understand acronym.
There are many people who hate to even hear the word “annuity,” and take an uninformed broad-brush stance to say that all annuities are bad (even though there are 15 different types). Annuities, and their largely unregulated sales practices, have earned this black eye, so I understand the public growing tired of the constant “too good to be true” agent pitches.
This relatively new strategy for future income guarantees allows you to attach the income guarantee to a regular investment portfolio. In essence, it’s an income rider or longevity annuity type guarantee without having to buy an annuity. It’s a PIG (and yes, it does exist), and once again the consumer is driving the discussion by demanding annuity guarantees without having to buy a typical annuity with sales charges.
For all of you self-proclaimed “annuity haters”, the PIG is your ticket to the income guarantees that most people desire without swallowing the annuity Kool-Aid. The product leader in this world, and my motivation for creating the PIG acronym, is the Aria Retirement Solutions strategy, led by income design visionary, David Stone.
My prediction is that longevity annuity guarantees within 401ks and IRAs will eventually be joined by the PIG strategy as another efficient choice to provide lifetime income starting at a future date.
Lifestyle income juggernaut
With the population aging, and the demand for income guarantees increasing, the annuity industry will have to address consumer needs and demands by continuing to offer simple and innovative solutions.
For most Americans, your retirement years come down to lifestyle and making sure that you have enough income to maintain that lifestyle. When the rubber meets the road, lifetime income really means lifestyle income.
The Treasury/IRS decision concerning longevity annuities is definitely a positive sign for consumers, and hopefully is just the start of many new income innovations to come. This trend is definitely good news for the income guarantee consumer.
Originally published 7.8.14 by MarketWatch.com – http://www.marketwatch.com/story/the-longevity-annuity-a-big-deal-for-retirees-2014-07-08