Annuity FYI Blog

There is a good chance that you are one of the many people who underestimate the strain inflation is likely to place on your finances in the future.  It is important to account for inflation in one way or another so that your money doesn’t run out faster than you planned.  Steve Burns of the Daily Breeze was asked about inflation and gave his answers in “Keeping up with inflation — stocks vs. bonds.”  Burns recently published an article about evaluating Social Security benefits through the use of an immediate annuity calculator.  The article said that the cost of an inflation-adjusted annuity would be about 50% more than the cost of purchasing a fixed annuity not adjusted for inflation.  A reader wrote in to ask Burns how he came up with this percentage and if he took age into consideration.

He looked at two different companies offering inflation-adjusted annuities.  While the 50% figure seems high to those reading it, he believes that many of us underestimate the real effects that inflation will have.  A 55-year old man using $100,000 to buy a fixed annuity with lifetime income would get a monthly payment of $420.  Compare that to an inflation-adjusted annuity where your payments would start at $268 per month.  That equals out to a 57% increase between the two types of annuities.  That number goes down to 39% if you wait ten years and purchase the annuity at age 65.  While there is a steep increase in the cost of an inflation-adjusted annuity, it is important to to account for inflation in some of your investments, whether it be your annuities or not.

Written by Rachel Summit

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The Sacramento Bee published a press release from John Hancock Financial Services introducing their new President of Annuities, John G. Vrysen.  He starts his position immediately and will be in charge of all aspects of John Hancock’s annuity business.  This includes variable annuities, fixed annuities, structured settlements, immediate annuity products, and other fixed products.  His boss is the President of U.S. Wealth Management, Hugh McHaffie.  Mr. Vrysen recently merged many of the company’s life insurance subsidiaries to increase company efficiency.

John Hancock’s President of Financial Services says that Mr. Vrysen has a plethora of both leadership experience and experience in their Variable and Fixed Annuities business.  Since 2008, he was the head of Strategic Initiatives, a position that will now be held by the previous President of Annuities, Marc Costantini.  Mr. Vrysen has worked for Manulife and John Hancock for more than three decades as the variable annuities’ chief actuary, the CFO of US Operations, the fixed annuities general manager, the COO of Wood Logan, and the COO for John Hancock Funds.

Written by Rachel Summit

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I recently blogged about the psychology of annuities and why more people aren’t using this product to receive guaranteed income for the rest of their life.  Sheryl Moore from Insurance News Net read the same article as I did, “Insights into the Annuity Puzzle,” and had her own theory about why more people don’t turn to annuities in retirement.  Since the original article didn’t have much of a conclusion to the puzzle, Moore tries to come to a better understanding in her “How to Escape ‘Annuicide’.”

She says that in order to guarantee your retirement income you need to either buy an immediate annuity or annuitize a deferred annuity.  With 1/5 of Americans realizing that they will never be able to retire and a tripling of the over-90 population in the last 3 decades, you’d think more people would turn to annuities that will offer income over their lifetime.  Moore points out that only 2% of annuity contracts annuitize to guarantee a lifetime income stream and immediate annuities don’t account for a large portion of annuity sales.  She has 3 reasons why she believes this is the case.

The first reason is that people who buy annuities don’t want to lose all of their flexibility, something Moore refers to as ‘annuicide’, where they are locked into their choice.  Secondly, with immediate annuities or annuitized deferred annuities, agents lose control of the assets due to the inflexibility and they cannot change up the investment.  The third reason is that commissions are only 3% on these annuities, compared with 6.6% on some indexed annuities and agents just don’t sell them as much.  Moore believes the solution to these three issues is the use of GLWB’s with a fixed equity indexed annuity rather than the traditional use with a variable annuity.  As of this past quarter, more than half of indexed annuities had an attached GLWB, so this seems to be a good solution.

Written by Rachel Summit

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I found an Insurance News Net article listing three very basic questions to ask before purchasing an annuity.  In Maureen McLaughlin’s “Guide Clients Down the Right Annuity-Route,” she says that the questions are just as important for advisors as they are for those purchasing the annuity.  It is crucial for clients to trust their annuity advisors and get the most reliable and understandable information from them.  Understanding annuities can be a time-consuming endeavor, but with the right expert advice it doesn’t have to be difficult.

First of all, you’ll want to decide the type of annuity that will work best for you.  Do you want to receive payments right away with an immediate annuity or use a deferred annuity to grow money tax deferred?  You also have the choice of a fixed annuity or one with variable annuity rates.  Make sure that you know why you are purchasing an annuity product in the first place.  It’s important for advisors to explain all of the benefits offered by annuities to clients and potential clients.  You’ve got to have a long term investment and financial plan in mind.

The last question to answer, and the one that frightens many clients, regards the fees associated with annuities.  Be up front with your clients if you are an advisor; if you are the client make sure to ask for all of the fees to be spelled out for you.  In addition to your annuity rates comparison, you’ll want to compare the fees associated with variable annuities, fixed annuities, and immediate annuities.  By knowing any product fees up front, you can better plan your retirement and use your annuity for a lifetime income stream.

Written by Rachel Summit

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One of the buzz-phrases in the retirement income world today is “product allocation.” Most people are familiar with “asset allocation.” It means dividing your savings among stocks, bonds, and cash (and perhaps commodities and real estate trusts) in a proportion that reflects your appetite for reward and tolerance for risk. But, according to some a person should switch from asset allocation to product allocation at retirement.

Product allocation refers to the practice of dividing up your savings among products that produce income (guaranteed or non-guaranteed) in different ways. One insurance company, in fact, recently created a web-based tool that shows people and their advisors how to generate steady revenue in retirement by taking regular withdrawals from a mutual fund portfolio, receiving a monthly income for life from a variable annuity with a lifetime income benefit (and an annual increase in the amount on which the income is calculated), and receiving additional monthly income from an immediate annuity.

Why those product types? According to Toronto-based academic and consultant Moshe Milevsky, each product protects the owner or owners against one of the three major financial risks in retirement. The mutual fund portfolio can help protect against inflation by holding stocks, which historically have tended to keep up with inflation. The variable annuity can protect against “sequence risk”. That’s the risk that a bear market will occur near your retirement date.) The immediate annuity protects against longevity risk-the risk that you’ll run low on money while still living. Variable annuities with living benefits also help protect against longevity risk. But the immediate annuity can actually reward you for living longer-something the variable annuity doesn’t do.

Written by Kerry Pechter