Meeting the Need for Income

A host of financial services firms are coming out with new products to help advisors protect their retirees’ income streams–everything from annuities that offer longevity protection and inflation protected funds, to products that offer income guarantees within defined contribution plans. Here’s a rundown of some of the companies’ offerings.

First, let’s talk about the new-fangled annuities that offer what’s being called “longevity insurance.” New York Life added a longevity protection rider, the Changing Needs Option, to its MainStay Lifetime Income Annuity last October. With immediate annuities, policyholders give the insurance company a lump sum, and the insurer, in turn, starts paying out a monthly income immediately. The Changing Needs rider allows policyholders to increase their payments at a future date of their choosing to, for instance, deal with an expected increase in health care costs. Payments can also decrease, at the policyholder’s request, by up to one-half of the original amount put in, notes Bill Formon, VP in the Individual Annuity Department at New York Life. According to an example provided by New York Life, retirees can choose to have higher payments earlier in retirement if they have a mortgage that will be paid off in a few years, and then elect to have their payments decrease once the mortgage is paid in full. Formon says the rider is most suitable for retirees who are 65 or older, noting that the income needs would vary based on a client’s age and gender.

The Hartford recently released its Income Security product, a single premium tax-deferred annuity that “guarantees lifetime income at a future point,” says Tim Benedict, a Hartford spokesperson. While the product is available now, Hartford is in the process of rolling it out through its broker/dealer, Woodbury Financial Services, according to Bene-dict. The annuity became available to other independent broker/dealers in early April. “Longevity is the one great unknown,” Benedict says. One of the biggest challenges of planning for retirement is knowing “how long I am going to need to make my money last.” Under the terms of the policy, if a client is 65 years old today and he wants to receive a guaranteed income of $1,000 per month at age 75, then he’d have to fork over a lump sum of $76,600. The client would invest $45,350 at age 65 if he wanted to start pulling in a $1,000 monthly income at age 80. If he wanted to receive the $1,000 monthly income at 85, then the client would need to invest $23,750 at age 65.

Benedict offers another example: say you’re a 60-year-old male and you invest $50,000. If you elect to take income at age 75, you can draw $1,000 per month. At age 80, your income stream from the annuity jumps to $1,900 per month, and at 85, it becomes $4,000 per month, he says.

Srinivas Reddy, head of product strategy and packaging at ING, says the company hopes to start “building out” its own longevity protection product this year.

Inflation-protection features are also popping up left and right these days. In December, Metropolitan Life Insurance Company (MetLife) introduced an inflation-protection feature to its Guaranteed Income Program, which provides that income payments will rise with increases in the Consumer Price Index for All Urban Consumers, or CPI-U. There is also no limit on payment increases–which means that there is no annual or cumulative payment “cap,” according to MetLife’s explanation of the product. “In an extended period of high inflation, benefit payment adjustments that are limited by an annual cap can significantly lag inflation,” according to MetLife’s release announcing the inflation protection feature. “As a result, ‘capped’ inflation adjustments can fail to protect an annuitant’s purchasing power throughout retirement. Also, there is no reduction in benefit for deflationary periods. An income payment will never fall below the prior year’s payment level.”

In February, Charles Schwab Investment Management launched the Schwab Inflation Protected Fund, which the company says is a mutual fund designed for investors who are in or near retirement. Schwab says a team of fixed-income experts will be running the fund, which will invest at least 80% of the fund’s net assets in inflation-protected fixed-income securities issued by the U.S. government, foreign governments, and U.S. and foreign corporations. The remaining 20% of the assets can be invested in fixed-income securities not structured to provide inflation protection, including 10% of assets in high-yield securities, according to Schwab.

In announcing the fund, Kim Daifotis, co-manager of the Schwab Inflation Protected Fund, said, “Unlike the typical TIPS (Treasury Inflation-Protected Securities) fund, the Schwab Inflation Protected Fund is able to seek inflation protection from a variety of sources–including inflation-protected corporate bonds and overseas inflation-linked investments–while at the same time not passing up opportunities to seek growth.”

DC Income Guarantees

Another hot trend are products that provide income guarantees within defined contribution plans, like Genworth Financial’s product called ClearCourse, which is a group variable annuity designed specifically for DC plans. DC investment options typically offer either equity market growth potential or guaranteed rates of return, but ClearCourse–which was launched last April–provides both in a single investment within a 401(k) plan.