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Life expectancy drives the income train

Life expectancy is the primary pricing mechanism for lifetime income annuities

Annuities are the only financial product on the planet that can guarantee a lifetime income stream, regardless of how long you live. Now that's a unique benefit proposition!  But for some reason, the annuity industry does not hammer this factual point to the growing demographic tidal wave of 10,000 baby boomers that retire every single day.

What a colossal marketing mistake in my opinion because most people are looking for contractual guarantees and more income. That’s an undisputed fact even in a raging bull market.

Principal + Interest

Even though most people are mistakenly fixated on interest rates, annuity lifetime income stream guarantees are primarily based on your life expectancy at the time you start the payments. Interest play a secondary pricing role.

Regardless of the annuity type, your lifetime income stream is a combination of return of principal plus interest. The unique value proposition is that when your account is at zero (i.e. you have outlived your projected life expectancy), the income continues uninterrupted and unchanged for the rest of your life.

Just like Social Security

You can’t hate annuities and also hate your Social Security payments, unless you are a financial hypocrite. Both are transfer of risk lifetime income guarantees. Just like Social Security, the older you are when you start the payments, the higher those payments will be due to your life expectancy being shorter. That shorter life expectancy equates into fewer payments, which makes those payments higher.

I always tell people that Social Security is the best “inflation annuity” on the planet because the increases to the income stream are driven by politics in my opinion.  If you want to attach an annual COLA (Cost of Living Adjustment) increase to your lifetime income annuity, the carrier will significantly lower those payments to make up for that increase.  Remember that annuity companies are wildly profitable because they know when you are going to die and they don't give anything away.

Timing Jello to the Wall

People are always looking for an arbitrage opportunity or the “perfect time” to buy an annuity strategy. Annuity companies have the big buildings for a reason. You can’t beat them. They know when you are going to die, and they price the guarantees accordingly. In other words, you can’t “time the purchase” of an annuity.  Please don't try.

For example, if you wait a year to purchase a Single Premium Immediate Annuity (SPIA) in order to hopefully catch rising interest rates, then you have to factor in the payments you missed while you were in “timing/waiting mode.” This isn’t a sales pitch…it's just a fact that you can’t beat them and you can’t time it…especially when life expectancy drives the pricing train.

Commodity Quote

Regardless of the type of lifetime income annuity you are considering (SPIAs, DIAs, QLACs, Income Riders), they are all commodity products and should be quoted through as many carriers as possible. Annuity quotes are like a gallon of milk because they expire every 7 to 10 days and need to be re-quoted unless those guarantees are locked in during the application process.

Quotes are also customizable to reflect your specific goals. Your life, joint life, period certain, life with period certain, installment refund, cash refund, and contractual COLA (Cost of Living Adjustment) increases are just some of the structural choices available to you with lifetime income quotes.

No ROI till you DIE

When you buy a lifetime income guaranteed annuity, you are transferring the risk to the annuity company to pay you for the rest of your life…regardless of how long you live. So there is no way to calculate your ROI (Return on Investment) until you die. Up until that point when your “Learjet hits the mountain”…it’s a pure transfer of risk.

In my opinion, having the life expectancy tables change against you is as much of a threat than trying to perfectly time interest rates. The bottom line is that annuities are contracts, and if the contractual guarantee is sufficient to meet your transfer of risk goal…then the timing might be right to add an annuity to your overall portfolio strategy.