Guaranteed Income Annuities Have Changed

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I’ve never been too successful talking about interest rates.  Most people have a pretty light appetite for fundamentals which unfortunately leads to the majority settling for something less than the best deal available.  So I’m going to give a simple example of how recent conditions have changed annuities in a way that will underscore my recommendation to defer and grow money safely.

In a case I’ve been working on for the past few months, I started by showing a 65 year old couple the payouts for a single premium immediate annuity.  In the beginning they could expect to receive 5.3% of the investment as guaranteed annual income for life.  This was back in February when the 10 year treasury was trading at about 1.5%.

As many of you understand, my first objective was to compare the guaranteed income payout to a deferred contract while using free withdrawals to match the income.  With modest growth, you can match income but have a substantial remainder down the road while staying in control of your money the whole time.  It’s so simple that a redneck from Montana can figure it out.

The main point of me suggesting you approach income that way is because most people think rates will rise in the long run.  Payouts increase with age as well so if you defer the income decision there is a high likelihood you will get greater cash flow in the future and quite possibly much greater.  Whether or not it’s the easiest way to do things, it is the most profitable.

As with many people, this couple had a hard time making a decision for several reasons relating to a general skepticism of annuities.  That’s ok because I promote detailed research as the best way to make a decision you can live with.  As time dragged on we entered into some serious economic calamity and interest rates dropped significantly.

Last week, I ran the numbers again and the same couple was now looking at a 4.9% payout from an immediate annuity.  In just two months the payout dropped by a meaningful amount because the ten year treasury had come down by almost a full percent.  When things turn around the exact opposite will happen and you will get paid more for the money you put in.  Or it will take less money upfront to meet the same income goal.

Please don’t argue with me about deferred products or bonus rates and the like.  Waiting to take payments is a lost opportunity cost and with all factors considered the IRR is identical to immediate income payments.  I love to argue so call if you’d like to be proven wrong.

Low interest rates are not the problem as commentators will suggest.  You just have to think outside the box and I’m not talking about anything complicated like finding a vaccine for a rapidly mutating virus.  It’s only a matter of a few simple principles that make sense.

A return to normal is the first thing that needs to happen before payouts recover.  Low rates have required the insurance industry to dial back offerings and several companies have been rated with a negative outlook.  That speaks more to company profitability than safety of your money, but such is life for those insurance companies who not only need to protect policyholders but also appease stockholders.

Private companies, however, don’t have to worry about stockholders and can build greater levels of reserves to keep business running smoothly during volatile time periods.  There’s no more magic to it than finding the stock with consistently high dividends.  The ability to reinvest profits without concern for stockholders sets them apart when you find slim pickings elsewhere.  These few companies are currently standing above the crowd with reasonable offers while others are pulling back in order to maintain stock values and financial ratings at the same time.  Where would you rather have your money as we wait for a recovery?

About seven years ago I helped a similar couple find the highest payout for an immediate annuity.  Their annual lifetime income equated to a 7.2% payout of the initial premium.  That amounts to 50% more annual income than the same couple could get today.  Rates don’t have to go to hyper-inflationary levels in order for you to get substantially more income for the money.  Modest growth will keep you in position to capitalize on the opportunity when it becomes too good to pass up.  The right strategy along with the best companies will put you in position to do just that.

I approach things the way I do because of what I’ve seen in the past.  Grow your money safely and access the funds as you see fit.  As conditions change you’ll be in position to make the most of it when the timing is right.  It’s really not that hard to figure out.

Let me know what you think… comment below or send a response to the email.

Bryan

8 replies
  1. Dan
    Dan says:

    Can you please write about the new IRS age rules for taking RMDs and the possible roll-over to a life-time annuity to achieve that goal and plus the extra income.
    I under stand that before; you needed to receive the RMDS in the year that you attained 70 and a half.
    Now it is 72? Does new rule mean take RMDs in the year you reach 72 or 72 and a half?

    Reply
    • Bryan Anderson
      Bryan Anderson says:

      Yes Dan, that idea has been in the hopper for a while now and I held off because the CARES Act put a little twist in it. I do know the age is simply 72 so nothing complicated but I’ll add more in the coming weeks.

      Reply
    • Bryan Anderson
      Bryan Anderson says:

      Pat, I simply mean privately held companies that don’t have public ownership by way of actively traded stocks. Mutual companies are technically owned by policy holders and among the most stable. That structure, however, wouldn’t allow freedom to reinvest profits into new products because all profits are paid out as dividends to policy holders.

      We covered this last time we spoke when I mentioned Midland National is reinvesting profits to keep products ahead of the competition while most others are just circling the wagons.

      thanks for giving me the chance to clarify.

      Reply
  2. KEVIN GERVAIS
    KEVIN GERVAIS says:

    Bryan,

    What commission schedule to you qualify for? In other words how do you as a salesperson receive payment and at what percentages for a given immediate payout contract?

    Reply
    • Bryan Anderson
      Bryan Anderson says:

      Sonja – that’s because this isn’t mutualfundstraighttalk.com

      That’s like comparing apples to oranges. I do however, relate annuities to all types of alternatives in much of the writing but it comes from an annuity perspective because this is an annuity website.

      Reply

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