To receive $17,000 in annual retirement income at age 65 ...
Source: New York Life
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Pre-retirees looking to secure future income might be attracted to deferred income annuities, and indeed sales of the policies are accelerating.
Sales are on track to hit $3 billion in 2014 from $1 billion in 2012, according to LIMRA, a marketing and research firm for the life insurance industry.
With a deferred income annuity, investors either pay periodic premiums, or all at once, to generate a guaranteed lifetime income stream in retirement. Insurance companies offering the annuities typically pay interest, adjusted as rates change.
Usually policyholders can defer payouts for 12 to 45 years; annual payouts can start as late as age 95.
A 55-year-old male who wanted to get $17,000 in annual retirement income at age 65, for example, could invest $150,000 into a deferred income annuity. By contrast, a 65 year-old would have to invest about $260,000 to get $17,000 in annual income, according to New York Life.
An annuity can be purchased individually or as part of a defined contribution plan. For defined contribution plans, guaranteed lifetime withdrawal benefits (GLWB) on variable annuities and deferred income annuities represent the two types of income guarantees currently sold. With a deferred income annuity, the employee pays into his or her defined contribution plan to buy units of the annuity. At retirement, the worker gets lifetime income.
LIMRA says that although nearly 60% of private-sector American workers have access to a defined contribution plan through their employers, most fail to offer an income annuity. This, despite the fact that LIMRA’s Secure Retirement Institute poll indicates 90% of workers under 34 think employers should offer ways to convert savings into retirement income.
So it’s surprising so few take advantage of the annuities when it is offered. While LIMRA’s 2013 survey found the number of retirement plans offering income annuities increased 10 percent over the prior year to 23,500, and the number of workers who have access to income annuities as part of their retirement plans grew to nearly 2.3 million, the number of workers who actually elected a deferred income annuity guarantee is significantly smaller, only 49,900, an increase of 5 percent.
Although deferred income annuities make sense for those at least a decade away from retirement or for younger people saving over the long term for retirement, some financial advisors don’t recommend them. Reason: Today’s low interest rates.
Eric Meermann, a Scarsdale, NY-based financial planner says the deferred income products he scrutinized offer a guaranteed interest rate for at least the first part of the accumulation phase, determined by the current interest rate. After the guaranteed period, the rate resets annually.
“Current low interest rates and the threat of inflation make fixed and deferred income annuities unattractive for people saving for retirement,” he says. “This is a great feature when rates are high and you can lock in significant earnings each year. Locking in 1% to 2% growth per year is not very appealing.”
He also advises that when clients lock in a low guaranteed interest rate on an annuity, they are ensuring a loss of purchasing power due to inflation.
Meermann recommends a balanced approach, dividing client assets among short-term bond funds and a diversified portfolio of U.S. and foreign stock funds.
Robert Bloink, tax professor at the Thomas Jefferson School of Law, San Diego, suggests that advisors keep an eye on new deferred variable income annuities about to hit the market. These annuities, which are expected to have riders permitting conversion to a deferred income annuity, could provide more growth potential than the fixed product. As a result, the policyholder would have greater liquidity.
Larry Frank, a Rocklin, Calif.-based financial planner, cites these factors as helping to determine whether a client should annuitize for income: Being older, having greater longevity relative to peers, aversion to holding equities and higher investment portfolio fees.