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SPIA–One Solution to the Longevity Concern: LIMRA

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Everyone who reads this blog and website knows what keeps Americans awake at night as they contemplate their future in retirement. It’s money. To be more specific, it’s the fear of running out of money.

Americans have reason to be concerned. The two traditional pillars of retirement income–company-paid pension plans and Social Security–are either fast becoming extinct or in serious need of life support. And the hit many retirement nest eggs took in recent years due the market downturn has added to the anxiety that there may come a day when there is no check in the mailbox.

As you work with your clients to solve the problem of running out of money, there are many investment strategies to consider. One option you might want to take a look at is to include a single premium immediate annuity (SPIA) as part of the investment mix in a retirement portfolio. Why a SPIA? There are two ways it can help.

The first is obvious. It creates a guaranteed lifetime stream of income, even if the rest of the portfolio becomes depleted over time. The second advantage of a SPIA is not understood as well, but it may be even more important over the long term. According to research conducted by LIMRA in 2009, applying a percentage of assets to a SPIA will always lengthen the lifetime of a portfolio. This is an especially important advantage during periods of sustained market volatility.

Our researchers examined 53 possible 30-year scenarios between 1926 and 2009, and applied varying amounts of SPIA from zero to 40 percent. Using a hypothetical portfolio, adjusted for inflation, we looked at a 65-year old retiree making 4.5 percent withdrawals each year.

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In the worst 30-year period, 1969 to 1998, a retiree with $100,000 in assets, but none in SPIA, would have run out of money after 23 years. However, a 10 percent SPIA allocation would have extended the life of the portfolio to 25 years, and a 20 percent SPIA to the full 30 years. Applying 30 percent to 40 percent of assets to SPIA at the beginning of the period would have increased the lifetime of the portfolio well beyond 30 years.

Some might argue that investing in a SPIA today is not a good idea because current interest rates are too low. It’s true that rates are lower now than they were in 2009 when we conducted our study. So why not wait until they go up? The problem is no one knows when that may happen. In the meantime rates might even go lower.

The key thing to remember is the two-pronged power of a SPIA–a guaranteed lifetime stream of income and the ability to sustain an investment portfolio over a longer period of time–holds true in up and down markets as well as high and low interest rate environments. This consistency provides an element of security future retirees are looking for more than ever before.

In addition to increasing the likelihood your clients will not run out of money during their retirement years, SPIAs also offer a good growth opportunity for your business. LIMRA is forecasting a nearly 11 percent increase in fixed immediate sales between now and 2016. The key factors behind this forecast are predicted increases in disposable personal income over the period and the rapid growth in the demographic most likely to buy a SPIA: the 60- to 90-age group.

So give the SPIA a look. It could be part of the solution your clients are looking for to avoid an empty mailbox.