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April 13, 2003 at 08:00 PM
By Frank J. Howell
Over the past several years, single premium immediate annuities (SPIAs) have quietly become the unsung heroes of the financial services industry. With todays retirees enjoying longer life spans and healthier retirements, the ever-dependable SPIA has suddenly become the one product in many retirees financial portfolio thats letting them get a little sleep at night–and these days, whos going to argue with a good nights sleep?
Recently published reports project that half the population will live past the age of 90. Combine this with the fact that fewer companies are offering defined benefit pension plans and the past three years market performance, its not surprising that an increasing number of retirees have become concerned about outliving their assets. Some of these retirees are turning to the SPIA for help.
For those of us with retired or soon-to-be-retired clients, its a concern–and a trend–to which we should be paying serious attention.
According to LIMRA International, sales of fixed immediate annuities increased 13% between 2000 and 2001, and by September of last year, sales had already matched 2001 levels. Why the sudden interest in what has traditionally been among the least glamorous products financial planners offer? The answer may be found in three simple words: “guaranteed lifetime income.”
SPIAs offer clients a variety of payout options (life only, period certain, joint & survivor, etc.) to help meet their particular income needs. What other type of investment product offers your clients a guaranteed stream of income for as long as they live–regardless of how long that may be? In an age where market conditions and longer life spans have evaporated even sizable nest eggs, SPIAs can offer your clients both flexibility and security.
But theres more to an SPIA than guaranteed income and dependability. Todays SPIAs are being used as integral components of many retirees estate preservation and retirement planning strategies. When purchased in tandem with traditional single premium deferred annuities (SPDAs), the results have been extremely satisfying–both in terms of income and asset preservation. Consider the following hypothetical example:
Bob and Betty Morgan retired a number of years ago. Figuring they would need about $60,000 a year to maintain their lifestyle, they decided to draw from three different sources: Bobs company pension plan, Social Security and the interest they were earning on certificates of deposit–money they had managed to set aside during their working years.
Then came the Tax Reform Act of 1993, which increased the taxation of Social Security benefits for married taxpayers whose provisional income exceeded $44,000. Following passage of the Act, retirees who were situated like the Morgans saw their income taxes go up and their spendable income come down. Unlike the Morgans, however, retirees who had their money in annuities were unaffected.
Why? Because while interest earned in savings vehicles such as CDs and municipal bonds is factored into the calculation of an individuals or couples provisional income, interest earned in annuities is not. Thus, annuity interest does not affect the taxation of Social Security benefits. In the Morgans case, the interest they were earning in their CDs bumped them into a higher provisional income tax bracket, resulting in additional income taxes and less spendable income. The solution for the Morgans was to move their money out of CDs and into a combination of fixed annuities.
