There is confusion on the internet, and even in the financial industry, about the value of annuities. Some of the dissonance occurs because there are several types of annuities and it can be confusing to decide how some of them might apply to an individual’s retirement situation.
But if we concentrate on income annuities, either immediate or deferred, we will see that more institutions – and smart people – are talking about their benefits.
They are beneficial to people who have saved a decent amount for retirement and are trying to figure out how to create guaranteed income for life, as opposed to hoping their retirement savings, invested in stocks and bonds, last as long as they do.
Here is a sampling of recent findings and observations that demonstrate income annuities are an important option for people who value simple, reliable retirement solutions.
David Swensen is head of Yale’s $26 billion endowment and author of Unconventional Success: A fundamental Approach to Personal Investment. Swenson has pointed out the benefit of deferred income annuities as a solution to the “problem” of living too long and potentially running out of money during retirement.
“Let’s say you’re 70, and you’ve got this deferred (income) annuity that starts at age 85,” Swensen said in an interview with NPR. “That’s a simple problem to solve. The longevity risk is taken care of by the deferred (income) annuity.”
Mark Iwry is senior advisor to the secretary of the Treasury and deputy assistant secretary for retirement and health policy. Treasury created rules to allow retirees to buy Qualifying Longevity Annuity Contract, or QLACs, with part of their 401(k) or rollover IRA accounts.
“All Americans deserve security in their later years and need effective tools to make the most of their hard-earned savings,” Iwry said. “As Boomers approach retirement and life expectancies increase, longevity income annuities can be an important option to help Americans plan for retirement and ensure they have a regular stream of income for as long as they live.”
Olivia S. Mitchell, Professor of Business Economics and Public Policy at the Wharton School, advocates income annuities for a well-balanced portfolio.
“I’m a big proponent of (income) annuities for retirement, for at least part of your portfolio,” Mitchell said in an interview in Forbes Magazine. “How much you want to buy ought to depend on how much you’re relying on Social Security, and how much you trust it will be there. How much you are relying on a corporate defined benefit plan. Many people may be already sufficiently annuitized, and not require additional. On the other hand, someone like me – I’m covered by Social Security, but never had a defined benefit plan – I ought to be thinking more about longevity protection so I have a paycheck for life, so that I don’t run out the day after I hit my life expectancy.”
John Shoven, Charles R. Schwab Professor of Economics at Stanford, wrote in the Stanford Institute for Economic Policy Research that retirees must consider the consequences of living longer.
“Remaining life expectancy has grown a great deal in the last 50 years, more than 40% for 65-year-old men, for instance,” Shoven pointed out. “The appropriate discount rate has gone way down in the last few years. All of this combines to make life (income) annuities more valuable and benefit deferral a very attractive proposition for today’s retirement-age individuals.”
Robert Pozen, a senior lecturer at the Harvard Business School, writing in RealClearMarkets.com, described how U.S. Treasury rules benefit the purchasers of deferred income annuities.
“A longevity (income) annuity should appeal to workers who believe they have enough retirement savings to last for one or two decades, although they just don’t know what would happen if they lived to age 90 or 100,” Pozen said.
In its 2015 report, The White House Conference on Aging praised income annuities for providing guaranteed income for life and noted that the Treasury and Labor departments both have issued guidelines in support of annuities.
“Lifetime income options like annuities provide a regular stream of income regardless of lifespan. Yet fewer than one in five defined contribution plans offer (income) annuities.” The latest guidance from the Department of Labor, the conference report said, “should encourage more employers to offer lifetime income annuities as a benefit distribution option in their 401(k)-type plans.”
And leading behavioral scientist Richard Thaler (who appeared in the movie “The Big Short”) recently said, “People worry that if they buy an (income) annuity and then die before the policy starts to pay off, their heirs will lose out. I tell them, ‘What you should be more worried about is if you outlive your money, you will have to move in with your kids.’ Ask your kids which of these outcomes they are more worried about.”
So what are you to make from the experts (with no financial incentive) agreeing on the value of income annuities?
My conclusion is that, as financial instruments, they perform as advertised: providing security, high cash flow, and customization to personal circumstances. What’s needed is a reframing of the benefits as the experts express above and to (1) use the term “income annuity” to describe the category, and (2) indicate that income annuities are only one part of the retirement solution.
If you have questions about annuities and how they might help meet your retirement objectives, write to me at Ask Jerry.
Or if you’d prefer to do more research on your own, take a look at the useful tools and information we offer in our Current Income Learning Center.
Pretty good article. I particularly like the fact that the types of annuities being discussed was specified. “Income annuity”, though generally means only an immediate annuity. So I’m not quite sure what the author is referring to when he talks about “income (deferred) annuities”. Is this a deferred contract with a lifetime income rider?
In our view, all income annuities provide for income guaranteed at issue of the contract. They can start within 13 months (immediate annuity) or after 13 months (deferred income annuity). Most involve lifetime payments and the pooling of mortality risks. They need to be distinguished from deferred annuities (fixed, variable, indexed) where the contract’s cash value needs to be annuitized to get the benefit of mortality credits.