Interest in assured income flows has never been stronger. The Following are some thoughts on how those flows can be achieved.
First, a look at the current situation. The need for income flows is being driven by the financial distress in which this country sees as the result of recession, market excesses of the past, and major government deficits.
In total, these factors have led to the recognition that neither the government nor the employer has the means to help provide for retirement income or benefits during the senior years beyond what already exists.
Further, it is quite clear that benefit expectations for Social Security are unrealistic in light of demographic patterns. It is probably safe to say that Americans in their late 50s or younger will have to work longer to get full benefits, and the full benefits they get may be reduced from those payable today.
It is equally realistic that Americans will have to work longer to build up other sources of wealth to enable them to manage during their retirement years.
Okay, so Social Security will provide one level of a monthly retirement benefit, at levels well below those that retirees will need to live a decent retirement.
With interest rates low and perhaps likely to remain so, alternative investments to provide additional retirement income are going to garner attention.
These investments include those yielding returns that are related to financial markets. Despite the mixed performance of markets over the past few years, I suspect that better alternatives simply do not exist.
In addition, indexed vehicles will likely continue to receive significant attention, in large part due to their downside protection.
I will go off the deep end and suggest that significant opportunity exists with indexed income vehicles.
The obvious appeal of such products derives from the prospect of periodic income increases if the index increases. (Unfavorable changes in the index would result in no change in the payout. In other words, the payment stream could only rise.)
The absence of an account value may increase the appeal of mechanisms in which certain changes in the S&P 500 index (or whatever index is used) would result in stipulated dollar increases in income. The income recipient would know exactly what index change leads to what amount of income payment increase.
A further appeal, applicable to all income vehicles, derives from a design feature that increases the retirement income if the annuitant becomes chronically ill.
The need for regular increases (annual would be optimal) is obvious, as the cost of living seems to rise with regularity, the need for increases to accommodate increased costs when a person incurs significant long term care expenses are rather obvious as well.
While not all income vehicles are for life, many are, especially the immediate annuity, which certainly provides the highest level of income available for a given deposit amount.
A vexing problem results from the producer’s sense that the sale of an immediate annuity will be the producer’s last deal with a given client. Some commentators have suggested using the immediate annuity payments to buy long term care instead of providing for LTC benefits within the annuity. While that does lead to a stream of commissions to the producer, it does not provide some of the same tax benefits to the customer as the integrated entity (annuity with LTC).
Some have suggested a trail be paid on the income payments. That does make some sense, as the producer’s responsibilities to his client presumably don’t end with the purchase of the income benefit stream.
I am not aware of any commentators who suggest a client’s entire wealth be used to purchase income streams. If one did so, there would be no access to emergency funds were such a need for them arise.
Cary Lakenbach is president of Actuarial Strategies Inc.