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Lifetime Income and The Secure Act

Stan Haithcock
August 24, 2020
Lifetime Income and The Secure Act

The Secure Act (aka The Secure Retirement Act) was signed into law on December 20th, 2019. The primary government intention was to encourage Americans to start planning for their own retirement income needs.

2 Words Matter...Lifetime Income

Over 10,000 baby boomers reaching retirement age every single day. With that, there is a demographic tidal wave of people that need lifetime income guarantees. Politicians know this and are trying to put laws in place to help people create their personal pension plan.

The purest lifetime income definition is to not outlive your money. You will have money hitting your bank account, regardless of how long you live. The majority of Americans want that to happen, but most don’t know how to make it happen.

Washington, DC would like every retirement plan to account for this longevity risk by offering lifetime income annuities within those employer-sponsored plans. Currently, fewer than 10% of 401k type defined contribution plans offer an annuity option. Hopefully, The Secure Act will change those low numbers.

Social Security is Step 1

Those beloved Social Security payment guarantees were never designed to be the primary source for your retirement lifetime income needs. In a perfect world, Social Security should be used as a secondary pension type strategy.

Unfortunately, less than 10% of private companies offer a traditional pension plan to their retiring employees. Those lifetime income guaranteed pension plans have been replaced by Defined Contribution Plans (i.e. 401k plans), Individual Retirement Accounts, and other employer-sponsored retirement plan types. These are primarily focused on the growth of your money instead of creating a lifetime income stream.

The Annuity Monopoly

How do you create income for life? One answer….annuities.

Annuities are the only financial product type that can guarantee a lifetime income stream. That’s a fact. Annuities are the only one that offers a monopoly type benefit. They are issued by life insurance companies, and the fixed annuities that offer lifetime income guarantees are regulated at the state level.

These are the annuity lifetime income products that you should be aware of are Single Premium Immediate Annuities (SPIAs), Deferred Income Annuities (DIAs), Qualified Longevity Annuity Contracts (QLACs), and Income Riders (attached to deferred annuities). All are transfer of risk strategies, and all offer lifetime income guarantees that will pay regardless of how long you live. Also, they all can be considered as personal pension products.

The annuity industry has done a poor job promoting this lifetime income monopoly, but new organizations like the Alliance for Lifetime Income are beginning to educate the public on a national level. With constant ads running that ridiculously say “I Hate Annuities,” a coordinated industry message is needed to combat this ongoing misinformed campaign.

So if you are asking “How much does a lifetime annuity pay?” or “How much can you earn on a $100,00 annuity per month?” You need to make sure you have access to a lifetime income annuity calculator that quotes all carriers. Annuities are commodities. An annuity quote changes every 7 to 10 days, like a gallon of milk, unless you lock in that quote during the application process.

The Secure Retirement Act “Shoulder Tap”

Our friends in Washington, DC are “tapping us on the shoulder” to remind and encourage us that it’s time to start putting in that guaranteed income floor for your retirement needs.

Plan fiduciaries, plan sponsors, plan participants. Were all targets for this Secure Retirement Act because 401k plans are now being encouraged to offer annuity lifetime income products within their plan. The Department of Labor along with the IRS are backing QLAC (Qualified Longevity Annuity Contract) type income strategies to be included as an investment choice to be used for future lifetime income needs so employees don’t just have to take the lump sum from their plan and add it to their retirement savings. Lifetime income disclosures along with overall education on annuities will be needed to inform workers on how annuities can enhance their retirement plan. Most people, unfortunately, don’t understand how annuities work.

The good news for plan sponsors is that The Secure Act included a provision that held those members harmless under a “Fiduciary Safe Harbor” clause. This means that plan sponsors can include the annuity providers they feel would be best for their organization without fear of being sued for not including all carriers. This is a good and bad thing for the consumer. The good news is that your plan will probably start offering annuity lifetime income products alongside mutual funds, etc. The bad news is that annuity lifetime income products are commodities, and should be shopped with all carriers to find the highest contractual guarantee available. For now, I’m just happy that plan participants will be able to choose lifetime income guarantees as one of their investment choices.

So the questions that should be asked with your employer-sponsored retirement plan are “What are your lifetime income options?”, “What type of lifetime income investment do you need to make?”, “How does it contractually work?” All are good lifetime income questions that need to be answered and fully explained so it’s understood before making a choice.

I’m glad that we are finally at this point where annuities will become part of most worker’s retirement plans. The Secure Act is all about lifetime income...which is a good thing for America.

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