Immediate Annuity Rates: Defer to SPIA Strategy
The Annuity Man
It’s kind of sad that the annuity category is experiencing somewhat of a renaissance during this virus crisis. In my opinion, contractual guarantees should be attractive at any time. However, it kind of makes sense that transfer of risk strategies become a little more attractive when the future is a tad hazy and unpredictable. In addition, stock market volatility always makes people reassess the overall risk levels in their portfolio.
Annuities were put on the planet during the Roman Times for lifetime income. They have been sold in the United States for hundreds of years for that very reason, and is still the primary need that most people need to solve for. Life insurance companies issue annuity contracts, regardless of the annuity product type, and back up lifetime income guarantees.
Even though the primary pricing mechanism for immediate income annuities is your life expectancy at the time you take the payments with interest rates playing a secondary pricing role, people are still overly obsessed with trying to “time” the purchase. I could factually prove to you that trying to “time” a Single Premium Immediate Annuity (SPIA) is a fools game, but it’s an inherent belief that people think they can always beat the system. With annuity purchases, you can’t. If you wait to buy a SPIA lifetime income stream in order to lock in a higher interest rate, then you have to factor in the payments that you missed while you are waiting. As I always say, annuity companies have the big buildings for a reason.
Immediate annuity rates (i.e. payout rate) is a combination of return of principal plus interest. That annuity payment, or rates of return, includes a mortality credit that is a shared risk pool with other annuity owners. The right time to purchase of an annuity to achieve that desired annual payment will never feel perfect. It all comes down to if the contractual guarantee works for your specific situation or not. I wish I had a better answer, or the perfect way to time it, but I don’t.
No Perfect Time To Buy
Even though the “annuity sales gods” will frown upon this factual statement, there’s no perfect time to buy any type of annuity. There’s only 2 questions you need to answer when contemplating an annuity purchase.
- What do you want the money to CONTRACTUALLY do?
- When do you want those CONTRACTUAL guarantees to start?
From those 2 answers, you can then choose the specific annuity type that can provide the highest contractual guarantees for your specific situation. If your first answer was lifetime income, and your second answer was for the contractually guaranteed income to start within one year...then the best solution would be a Single Premium Immediate Annuity (SPIA).
But as we know, no financial decision can be that simple and static. Before you place that irrevocable lump sum into a SPIA to provide that retirement income to combine with your Social Security payments, there is one more annuity strategy that no one but me seems to talk about. It's putting off the purchase...and what I call "Defer to SPIA."
Defer to SPIA
When your financial advisor, financial professional, or agent sells you an annuity, they are paid a built in commission by the issuing carrier. Remember that annuities are life insurance products, and Single Premium Immediate Annuities (SPIAs) are categorized as fixed annuities. Fixed annuities are not securities, and they are regulated at that state level.
That commission is hidden from the client, so if you put $100,000 into a SPIA...then you will see $100,000 on your statement. The agent or advisor got paid a one time commission, but it came from the carrier’s reserves.
The reason that I laid out that foundation of compensation was to point out that putting off the purchase of a SPIA is not going to be a recommendation you hear often. For that reason, it might make sense for your specific situation.
Even though life expectancy drives the immediate annuity pricing train and interest rates play a secondary role, it’s common sense that your locked-in payment would be a shade higher if the U.S. 10 Year Treasury rate were at “normal” levels. The other key point you need to consider is that once you place that initial investment in a Single Premium Immediate Annuity (SPIA), you have permanently locked in those life expectancy tables and interest rates. I’m not saying that’s a bad thing, because if you need to fill an income gap right now, then it is what it is. You have no choice but to “lock and load” for lifetime income. But the irrevocable nature of that SPIA purchase is serious food for thought.
Keep Your Powder Dry
The essence of my “Defer to SPIA” strategy is that there’s an argument to keeping your powder dry as long as you can. Yes there are very good arguments to purchase an “Income Later” annuity strategy from a planning standpoint to know to the penny what your future lifetime guarantees will be. Deferred Income Annuities (DIAs), Qualified Longevity Annuity Contracts (QLACs), and Income Riders attached to some deferred annuities can all provide that transfer of risk pension guarantee that starts at a future date.
However, if you (or someone you can trust) can manage your non-annuity assets for growth while mitigating portfolio risk...then the “Defer to SPIA” strategy should be your income plan for the future. In other words, you purchase the SPIA at the exact time you need the lifetime income to start. With SPIAs, those contractually guaranteed payments can hit your bank account as soon as 30 days from when the policy is issued.
Just like with your Social Security payments, the older you are the higher the income stream. That’s because your life expectancy is less, which means the projected payments will be shorter...and the payments will be higher. The other hope is that interest rates will also move in your favor as you wait to pull the trigger on the SPIA purchase. Less life expectancy plus higher interest rates is a good combination for Single Premium Immediate Annuities (SPIAs).
Remember that all annuity types, including SPIAs, are commodities and should be shopped with all carriers using an objective annuity calculator that will list the highest contractual guarantees for your specific situation. SPIA quotes are like a gallon of milk, and expire every 7 to 10 days unless they are locked in during the application process.
So you need to add one more annuity strategy to all the others you will be pitched. I can pretty much guarantee that “Defer to SPIA” will not be presented at the next bad chicken/steak dinner annuity seminar you attend. That should tell you all you need to know.
“Defer to SPIA” is pro-consumer, and might be the right strategy for your future lifetime income needs.