Annuities: Timing The Purchase
The Annuity Man
The Gordon Gekko in all of us looks for that sweet spot and arbitrage moment to pull the trigger on any financial purchase. Some of us are so obsessive compulsive (either literally or figuratively) that this timing focus trickles down to everyday life. Buy one get one free at the grocery store, using coupons whenever possible, and negotiating just because...can be described as both an obsession and a sickness. On a funny side note, I’m not sure my 81 year old mother that lives in St. Augustine, Florida can even swallow food without using a coupon. I have named that the Boomer Pavlovian Consumption Syndrome!
As “America’s Annuity Agent,” my day is filled with master of the universe annuity buyers asking me about timing the purchase. They are used to at least trying to find a sweet spot before they invest their money, and annuities are just their next timing target.
Annuities were put on the planet in the Roman Times as a lifetime pension payment for the dutiful Roman soldiers and their families. That’s where annuities started, and that first Roman annuity type is today’s Single Premium Immediate Annuity (SPIA). In fact, annuities are the only financial product on the planet that will guarantee income regardless of how long you live. Annuities have that monopoly on lifetime income.
I’m not sure if the Roman soldiers tried to time their annuity payments, but the over 10,000 baby boomers reaching retirement age every single day are sure trying. I know that you are not going to believe me, but trying to time your annuity purchase is a colossal waste of time. It’s the perfect example of trying to nail jello to a wall. I know that your sales radar just went off and you think this is just some veiled sales pitch. It’s not. It’s the brutal annuity truth, so let’s look at the reasons why so I can save you that analytical time for the rest of your portfolio.
Big Buildings For A Reason
I always tell people that annuity companies have the big buildings for a reason. They know when we are going to die and they don’t give anything away. If you want an extra benefit added to the policy, no problem. They will just price that in. Want to add another person to a lifetime income stream, that’s a done deal. They will just lower the payment to make up for the additional life expectancy they are covering. Want to have your income increase to cover for inflation, then just pick the percentage you want the income stream to increase by at the time of application. To cover that increase, the annuity company will significantly decrease that initial payment level when compared to the same annuity without that contractual increase. Thinking about adding an attached benefit Income Rider to your Variable or Indexed Annuity for future income guarantees? The annuity company has no problem adding that to the policy, and will charge you an annual fee that’s taken out of the accumulation value for the life of the policy. Yes, the life of the policy. Do you see the trend here?
Another reason for the big buildings and the large annuity company logos on the private jets is the fact that they know when we are going to die. Don’t believe it, then just ask their army of actuaries. Lifetime income is a combination of return of principal plus interest, regardless of the type of annuity you choose. Your life expectancy is the primary pricing mechanism, with interest rates playing a secondary role. The annuity company is on the hook to pay regardless of how long you outlive your life expectancy, and even if there is no money in the account. That’s the true benefit proposition that only annuities can provide.
Payments Missed & Cooking Time
Even though interest rates play a secondary pricing role with lifetime income guarantees, people are mistakenly fixated on “timing interest rates.” You certainly can’t time life expectancy, but people sure do try and time interest rates. I tell people every day, to their dismay, that it’s a waste of time. Some believe me, and some don’t.
Here’s the non-sales pitch facts. For example, if you wait to buy a Single Premium Immediate Annuity (SPIA) in order for interest rates to go up, then you have to factor in the payments you missed while you were waiting. That’s assuming you purchased the SPIA right now. The bottom line is that you can’t beat the annuity company at their own game.
The same thing applies to deferring income down the road compared to buying income to start immediately. As I always say, there’s no perfect annuity answers...just bad sales pitches. It is a fact that the longer you allow an annuity company to hold onto your money while you defer to turn on income, the more they will enhance the payment. In other words, “the more it cooks, the more you get.” I had to channel my Southern upbringing there to drive the point home.
So put down the hammer and nail, and eat the jello.
Defer to SPIA & Laddering Strategies
It’s a no-brainer that even with interest rates playing a secondary pricing role with lifetime income, higher rates would be better for your payments. But never forget that life expectancy (i.e. part of the annuity mortality credits) drives the pricing train. Waiting to buy an income annuity is also risky because annuity companies could change the life expectancy tables against you. In my opinion, that’s as much of a risk as the interest rate focus too many people mistakenly make. If an annuity company changed the life expectancy tables in their favor, they would be predicting that you would live longer. That would mean more payments, and those payments would be lower.
Now that I have factually laid out that you can’t beat the insurance companies at their own game (please don’t try), then you only have a couple of viable options available to you. They aren’t perfect, but it’s all you have.
The first strategy is what I call “Defer to SPIA.” You keep your powder dry and fully invested until the exact time you need lifetime income. At that time, you then shop all carriers for the highest contractually guaranteed Single Premium Immediate Annuity (SPIA) for your specific situation. The annuity sales gods hate this strategy, which means it’s pro-consumer and something to seriously consider. “Defer to SPIA” takes any “timing” out of the picture. The only timing that matters is when you need the income to start.
The other practical approach is a “Laddering Strategy.” This could mean laddering the income start dates by purchasing numerous contracts, or you could ladder the actual purchase of those contracts over time. If you want to get really fancy, you could ladder both. Think of this as an offshoot of the ever popular dollar cost averaging strategy that has been promoted with non-annuities for decades.
Always remember that annuities are contracts. They are not like typical investments. You always buy them for their contractual guarantees and shop all carriers for the highest number. And if that contractual number makes sense and fits well into your overall goals, then you might want to permanently lock that in.
When it comes to timing an annuity purchase, that’s as complex as it should ever get.