The Problem with Guaranteed Lifetime Income
During meetings people frequently comment that they know I don’t like guaranteed lifetime income. I guess I do understand why people say that since most of my writing and advice centers around finding the best deal and guaranteed lifetime is only the best deal in a very specific situation.
So it surprises me to know many people get the message that I don’t like it because that’s not the type of message I’m trying to spread at all. The insurance industry survives on long-standing principles of security and consistency. The push to sell guaranteed income to baby boomers is an attempt to capitalize on a person’s fear of running out of money in retirement.
Running out of money in retirement is a real concern and my aversion to using guaranteed income products in most scenarios doesn’t mean I don’t think it’s important. It’s more a matter of adjusting to current market conditions. Today’s market conditions show that income products are not the best deal. Again, it depends on an individual situation because it can still be the right choice but everyone needs to explore all options for making that big a commitment.
The truth of the matter is that I love guaranteed lifetime income. That’s why I’ve worked so hard to make it even better than the industry says it can be. Below I’m going to give you all the reasons why you should consider an alternative to the standard approach of producing income in retirement.
Most of the people I work with have an average age somewhere in their mid-60s. Payouts for lifetime income are best when the buyer is in his/her mid-70s. This puts most people in the market to buy when it’s not the best time to buy. If this is you then you need to explore a short-term strategy that protects assets but gives you the option to change the plan when better opportunities come available.
I’ve said this hundreds of times and I’m not quite sure it sinks in. When rates are low you want to be a borrower, not a lender. When you buy lifetime income you are essentially loaning money to the insurance company in exchange for payments. Your money is stuck at today’s interest rates for up to 30 years in many cases. The realistic choice is to hold off on long-term commitments so if rates rise you can wait to lock in when it’s a much better deal.
Because most people are shopping too early and interest rates are low, the cost of buying guaranteed lifetime income is prohibitively expensive. Look at it this way, the average income contract takes a minimum of 18 years until the buyer breaks even. So for a buyer at age 65 it will take until age 83 before you get back in payments every penny you put toward premium. This means the average person needs to beat life expectancy by a significant margin in order to make the income annuity a good investment.
Since the cost is high it takes a larger portion of the average portfolio to purchase the guaranteed income a person needs. The cost of this comes when you have less to invest elsewhere for future planning. Many guaranteed income plans leave you without options for optimal growth, inflation planning, discretionary spending or a legacy. This is so much more important than most people realize and that’s why my solution to this problem is called the AST Flex Strategy.
There are a lot of opinions out there and if I may be completely honest, there are lots of people with opinions who have no idea what they are talking about. During one meeting last week a lady said another advisor told her that most people don’t sell immediate annuities because they don’t pay enough commission. That’s about as ridiculous as Ken Fisher saying he doesn’t make as much money as an insurance salesman but he’s willing to pay surrender fees if clients will cancel annuities and put those funds under his management. I don’t know how the actual numbers look but Fisher did not become a billionaire by losing money and he doesn’t run a charity. Choose your strategy on facts and analysis, not a random opinion.
So at the right age, when interest rates give you a good deal you’ll be able to use an income annuity without using the majority of your assets to do it. Until then use a short-term strategy that allows you to keep control of your assets. It won’t matter what anyone else says because you’ll have fundamental analysis that proves you’re doing the right thing.
I like guaranteed lifetime income but I don’t agree with the standard message from the insurance industry and I find fault with most of the plans put forth by other advisors. Guaranteed income products have their place but I see the appropriate situation only about five times per year. As time goes by and markets change my recommendation may change as well. But for now I’m more interested in making sure people get the best deal and I’m going to put in a little extra work before I recommend a major financial commitment to anyone.
Talk to you next week!