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Retirement Planning > Saving for Retirement

MDRT Speaker: Remember The Mortality Credits

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VANCOUVER — Financial professionals should be sure to remind lifetime income annuity prospects about the value of the product’s mortality credits, Tom Hegna said here at the Million Dollar Round Table annual meeting.

Hegna, a vice president at New York Life Insurance Company, New York, who holds the Chartered Financial Consultant professional designation, was one of the experts who spoke Tuesday during the main platform session.

MDRT, Park Ridge, Ill., says the meeting has attracted a total of more than 6,000 attendees.

A mortality credit is a mechanism for reallocating the annuity contributions of holders who die to those who survive.

“The reason you buy a lifetime income annuity is to get paid mortality credits–and all lifetime income annuities offer them,” Hegna said. “The older you are, and the longer you live, the more mortality credits you get paid.”

Hegna related a hypothetical scenario involving 5 women, each 90 years old, who agreed to share evenly, in each of 5 successive years, $500 placed in a box for their benefit. In the second year, one of the 5 women dies, leaving the remaining 4 with $125, a 25% gain over their original allotment.

In the third year, a second dies, increasing the total $167 each, a 67% return. With each additional death in subsequent years, the amount apportioned to surviving women increases in like fashion.

Likewise, Hegna observed, annuity providers can offer progressively higher interest rates on their products as clients age. The example he used showed individuals age 65, 75 and 85 receiving payouts of 7%, 9% and 14%, respectively. They can do this precisely because of these mortality credits, a feature not available on alternate financial products.

How much of the client’s money should go into a lifetime income annuity? The “mathematically and scientifically correct” answer, said Hegna, is an amount that will at least cover basic expenses.

But he added that clients cannot optimize retirement income using the balance of their investable assets without rounding out the portfolio — including bonds, cash and various classes of mutual funds — with a second lifetime income annuity.

Without a life income annuity, the only way to optimize income in retirement is to know the day the client will die, Hegna said.

Though that’s not possible on an individual basis, Hegna said insurers can determine when, on average, a pool of individuals will die, thereby enabling the carriers to pay as though they knew when each person within the pool would die.

Hegna said annuities can also be creatively used to establish a multi-generational legacy. He cited a hypothetical case in which a grandfather buys a joint lifetime income annuity with a starting investment of $100,000, naming a granddaughter as joint annuitant. The annuity also carried a 50% death benefit for the granddaughter’s beneficiary.

The product pays the grandfather $4,700 per year for life, and, at death, provides the granddaughter with an equal sum for the duration of her life (to age 100), each payment falling on her birthday.

With an annual 5% inflation rider attached, payouts to grandfather, granddaughter and the granddaughter’s beneficiary total, in Hegna’s example, nearly $2.6 million.

“What product other than an annuity allows a grandfather to transfer almost $4 million to 2 generations with a starting investment of just $100,000?” he asked.

Assuming a diversified portfolio, said Hegna, 25% of retirement accounts will “fail,” declining to zero before the retiree’s death. The failure rate increases as the annual withdrawal percentage increases: assuming withdrawals of 6%, 7% and 8% year, the portfolio failure rate increases to 50% 75% and 90%, respectively.

Key reason: the order of returns. While average annual returns on investments will determine how much money a client has at retirement, the order of returns during distribution will dictate whether the accumulated savings will last the length of retirement.

Significant negative returns during the early years of retirement, followed by positive returns in later years, will drain retirement funds faster than when the order of returns is reversed–even though average annual returns are the same in both cases.

“If you lose money early in retirement, it could devastate your savings,” Hegna said. “Losses later in life will have much less of an impact.”


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