44 INVESTMENT ADVISOR JULY 2018 | ThinkAdvisor.com
nificant awareness and education issue
in the annuity space.
Mispricing the true cost of income:
Brown’s study also demonstrates that
investors tend to badly misprice the
value of guaranteed income for life and
how much it really costs. When asked
how much they thought a 60-year-old
male should be willing to pay to get an
income of $100 per month for life, the
median answer was $5,875, a fraction
of the approximately $20,000 it would
actually require. Advisors see this every
day when some clients believe they can
retire on just $250,000 and/or safely
withdraw 10% of their portfolio each
year. This would also explain why virtually every lottery winner elects to take
the lump sum rather than the lifetime
income and most people take Social
Security at age 62.
Given all the obstacles standing in the
way of immediate annuity sales, why
should you make them a regular part
of your retirement income planning
process? Let me answer that question
with another one: Is it easier to plan
for retirement for a client who has a
pension or one who does not? Rather
than look at an annuity as a drain on the
client’s assets, think about how much
more investment flexibility you have
with the rest of the portfolio when an
annuity is part of the overall retirement plan. With a sufficient guaranteed
income for life, you can reduce the
uncertainty around a client outliving
his or her savings, reduce sequence of
returns risk, and implement an appropriate target growth for the remainder
of the client’s portfolio.
Outside of a single client’s retirement
plan, to make Dick Austin’s dream of
substantial growth in the immediate
annuity space a reality, we need to do
1. Shift the paradigm so clients
understand an annuity as a risk transfer tool rather than an investment.
The purpose of the immediate annuity
is to secure income for a client’s life and
transfer both the longevity risk and the
sequence of returns risk to the insurance
company. It is not to provide an investment return to the portfolio.
2. Position immediate and deferred
income annuities as a supplement. With
pensions continuously disappearing, an
immediate annuity’s guaranteed income
for life can create a “personal pension
plan” and work hand in hand with Social
Security like pensions have historically.
3. Educate clients on the true financial value of lifetime income. Studies
have indicated it takes much more to
fund lifetime income than clients believe
it will. Just as no one will exchange a $20
bill for five $1 bills, they are not likely to
buy an annuity until they understand
the true cost of securing an additional
$1,000 per month for life.
Scott Stolz is Senior Vice President of
Private Client Group Investment Products &
Wealth, Retirement & Portfolio Solutions at
All guarantees are based on the claims paying ability of the insurance company. Surrender charges may apply for early withdrawals and, if made prior to age 59 ½, may be subject to
a 10% federal tax penalty in addition to any gains being taxed as ordinary income. Please consult with a licensed financial professional when considering your insurance options.
A Quick Annuity Lesson
Looking for a way to help educate your clients on the true cost and, therefore, true
value of lifetime income? I would suggest taking the client’s expected Social Security
benefit and then working backwards on one of the many immediate annuity quote
engines. Calculate how much money it would take to fund that level of income.
As an example, let’s assume we have a husband and wife who both elect to
begin taking Social Security at 65 and are both expected to receive their own
benefit of $2,250 per month, or $4,500 total for the two of them. Let’s further
assume that this payment increases at 1.5% per year. Because they both are
receiving their own benefit, the survivor will continue to receive $2,250 per month
when the first spouse dies.
Your clients would likely be surprised to learn that it would take just over $1 million to fund an immediate annuity with similar terms. They also would likely have
a much greater appreciation as to why Social Security is going to be such a financial drain on the federal government. —Scott Stolz