Picking the right annuity is a ‘lifestyle’ choice
Guaranteed income planning is driving annuity sales to record levels, but solving for longevity risk isn’t just about income, it’s really about lifestyle.
In the annuity world, most income rider (attached benefit) structures have acronyms that explain the benefit provided. GLWB stands for Guaranteed Lifetime Withdrawal Benefit. GMIB stands for Guaranteed Minimum Income Benefit. GLIB typically stands for Guaranteed Lifetime Income Benefit, but I think it’s time to change the “L” to Lifestyle because that’s that true value proposition of income for life annuities.
When you finally decide to turn off CNBC and cancel your Investor’s Business Daily subscription, all you are going to care about is your lifestyle. In most cases, your spouse already has that mind-set and doesn’t care at all about your stock market strategies. If you don’t believe that’s true, then ask them. I will guarantee that your spouse’s only concern is maintaining their lifestyle and being able to see their kids and grand kids. Your treasured portfolio asset allocation isn’t in their top 10.
ROI when you die
One of the automatic responses that many investors reflex to when looking at annuities is trying to calculate ROI (Return on Investment) numbers on the strategy. I get this call all the time, and my response is always “tell me the day you are going to die, and I can provide the exact ROI — to your beneficiaries.” With contractually guaranteed income annuity strategies, there is no way to run ROI numbers until the day you pass away. If the income strategy is set up joint with your spouse, then there is no ROI until both of you die. Up until that point, it’s a pure transfer of risk.
There is no ROI on maintaining or increasing your lifestyle. Do you care what your ROI is on your pension or Social Security payment. Of course not! All you care about is that money hitting your bank account every month. That’s the same way you should look at annuities that provide income guarantees for life.
Will the carrier be around?
It is common sense that if you are going to transfer the risk to an insurance carrier to guarantee your income for life, you need to make sure that they will be around decades from now. Because there are over 10,000 baby boomers retiring every day, this has created a tsunami of money in motion, and now everybody and their brother seems to be getting into the income guarantee business.
I’m always amazed how many people place their money with an annuity company that they have never heard of and have never researched. Just because the agent said it was “OK” doesn’t mean it’s OK. Remember that annuity guarantees are only as good as the carrier backing them up. That means not looking at the state guaranty fund, and only focusing on the carrier to make your decision. Your ongoing lifestyle depends on it.
Apples to oranges
In my opinion, annuities should not be looked at as investments. I know that makes the heads pop off of variable-annuity cheerleaders and indexed-annuity cult sales promoters, but I don’t believe annuities are growth products. In the near future, I think the public will realize this fact as well, and the majority of annuities sold won’t be these two high-commission products but instead shift to simplistic income guaranteed strategies.
Comparing your mutual funds, stocks, or ETF portfolios to annuities is an exercise in futility and the definition of “apples to oranges.” Annuities will NEVER compare favorably to real growth investments, and even attaching policy guarantees will never justify the growth proposition that most are looking for.
Treasury rate realities
Annuity income guarantees are primarily based on your life expectancy at the time you decide to start taking payments. The other primary pricing component is the 10-Year Treasury, which we all know is at a low level. The reality is that no one can predict when rates will move, and in what direction. It’s cavalier to say that they have to go up soon. Ask Japan about that “has to go up” statement.
No one on the planet can perfectly time interest rate movements. When it comes to your lifestyle, the only “timing” you should care about is that the guaranteed income will last for as long as you live. The only date that matters, and that you won’t be around to see, is the day you die. Up until then, what matters is your lifestyle.
Bull market blinders
It takes investor maturity to not be sucked into the current bull market euphoria. I’m always amazed at the selective memory loss that most have when it comes to the fact that markets can actually go down. That’s hard to fathom in the past few years, but we all rationally know that it’s just a matter of time until another “event” happens.
Let’s set the record straight once and for all when it comes to annuities. Annuities aren’t investments. Annuities aren’t growth products. Annuities aren’t too good to be true. Annuities aren’t one size fits all. Annuities are simply transfer of risk strategies that can enhance your lifestyle by providing contractually guaranteed principal protection, income for life, legacy, or long term care coverage. Annuities provide lifestyle, and maintaining that lifestyle primarily involves income for life.
With markets at all time highs, it is important to keep your eye on the eventual prize. That prize is your lifestyle. Your GLIB. Your Guaranteed Lifestyle Income Benefit.
Originally published 8.26.14 by MarketWatch.com – http://www.marketwatch.com/story/picking-the-right-annuity-is-a-lifestyle-choice-2014-08-26