By Stan The Annuity Man
The Latin word for payment is “annua.” Guess where the word “annuity” originates from? You got it. Our mighty Roman brethren were the first to use annuity lifetime income payments as a reward to their dutiful soldiers and families. A lifetime income stream was provided for their service to the empire. I guess you could call this the first government pension.
From that unique beginning, income annuities have been sold in the United States for over 200 years, and were the only type of annuity available until the mid-1950s. That’s when the first variable annuity was introduced by TIAA-CREF. It’s been downhill from there in my opinion, because the focus was now market growth not income. In 1995, indexed annuities were introduced and today more than 75% of all sales are unfortunately represented by high commission variable and indexed annuities.
Even though there are annuity types like MYGAs (Multi Year Guarantee Annuities) that function like a CD, most annuity product choices are designed for lifetime income.
Unique benefit proposition
The lifetime income guarantee that annuities provide is unique in the financial world. Annuities are the only product on the planet that provides a lifetime income stream regardless of how long you live. I call that transferring risk. You are transferring the risk to the annuity company to pay you for as long as you are breathing. If you live to age 150, they are on the hook to pay.
Choose your income candy, ‘Now or Later’
Income planning using annuities is pretty basic. You either need to have the payments start right now, or sometime in the future. If “Income Now” is the goal, then a Single Premium Immediate Annuity (SPIA) will provide you the highest contractual guaranteed payment. Don’t let some commission hungry agent convince you otherwise by trying to sell you a variable or indexed annuity for immediate income needs. That’s the financial criminal version of ‘putting a square peg in a round hole.’
If income in the future is the goal, there are numerous annuity types that can contractually solve for “Income Later.” Deferred Income Annuities (DIAs) are also called ‘longevity annuities”, and are a simplistic structure for future income needs. Qualified Longevity Annuity Contracts (QLACs) are used within Traditional IRAs, and Income Riders can be attached to deferred annuities (like variable & indexed) to guarantee a lifetime income stream down the road.
It’s important to point out that ALL annuities are commodities, and you should shop ALL carriers for the highest contractual income guarantee. There is no “best annuity” regardless of what an agent tells you. There’s only the best contractual guarantee.
It a transfer of risk, not an investment
One of the dumbest questions I consistently get is “What is my return on investment (ROI) on my income annuity?” Duh! My answer is that I don’t know what the ROI is until you die……or as I scream “There’s NO ROI till you die!” Up until that point of your demise, your guaranteed lifetime income stream is a pure transfer of risk. Because I’ve been known to be a nice guy, I do promise to tell your beneficiaries at your funeral the ROI on your annuity. That’s after I sing at the church service, of course!
The bottom line is that annuities are contracts, not investments. To try and compare the two is an ‘apples & oranges’ mistake.
The annuity company doesn’t keep a penny
My guess is that the majority of people think that buying an annuity means you get an income stream, but when you die the annuity company keeps the money. Of course that’s not true, and only describes one (“Life Only”) of over 15 different ways you can choose to contractually structure the payments.
Annuity lifetime income stream guarantees are customizable at the time of application. You can contractually dictate exactly how you would like the policy to work.
The market growth + income dream sales pitch
If you think that you can get market growth and income at the same time with annuities, then you also believe that you can unicorns exist and that smoking helps your throat. I know that starry eyed agents pitch their favorite variable and indexed annuity to provide growth and income…..and that you can have your cake and eat it too. I’m telling you that sales pitch is a crock of crap.
If you want market growth, NEVER buy an annuity. If you want income guarantees, then you should shop annuities for the highest payment. You can’t have both. Deal with the facts, and don’t let some over hyped agent convince you to ‘buy the dream’ because it doesn’t exist.
Inflation realities with annuity payments
Annuity companies have the big buildings for a reason. That reason is they don’t give anything away. If you add something to a policy, then they take something away. This is an important annuity fact to remember.
Some annuity policies allow you to contractually attach a COLA (Cost of Living Adjustment) or CPI-U (Consumer Price Index) annual increase to your payments. Sounds fantastic in theory and at the bad chicken dinner seminars, but the reality is that annuity companies will lower the payment if you add this type of increase.
In most cases, it makes more mathematical sense to buy the same annuity without a COLA or CPI-U increase. By the way, you already own the best inflation adjusted annuity on the planet. It’s called Social Security.
Here are your annuity income strategy choices:
SPIAs (Single Premium Immediate Annuities)
These are the original Roman design, and still the most efficient and pro-customer way to generate income now. Payments can start as soon as 30 days from the contract issue date, and as far out as 13 months. No annual fees. No moving parts. No market attachments. This is a pension product. Pure and simple.
DIAs (Deferred Income Annuities)
This annuity type is also referred to as a “longevity annuity”, but the design structure is the same as a SPIA. Very simplistic and easy to understand, DIAs solve for income needs with payments starting at a future date of your choice. No annual fees. No moving parts. No market attachments. Lifetime income payments can start as soon as 13 months, and can be deferred as far out as 45 years (depending on the specific carrier).
QLACs (Qualified Longevity Annuity Contracts)
Introduced in July of 2014 by the Treasury Department and the IRS, QLACs are used inside of a Traditional IRA for future income needs. You can attach a spouse for joint life payments, and the income stream has to start by your age 85. Premium limitation rules are the lesser of 25% of your total IRA assets, or $125,000. QLACs are just like DIAs from a structure standpoint. No annual fees. No moving parts. No market attachments.
CGAs (Charitable Gift Annuities)
A hidden and somewhat unknown gem in the annuity world is the Charitable Gift Annuity. It functions like a SPIA, and can also be structured like a DIA. The difference is that when you die, the money stays with the charity, university, or non-profit that issued the CGA guarantee. In addition, you can receive a large tax write-off as well. To learn more, I advise you to go to the association (www.aca-web.org) that oversees all CGAs. You should also contact your charity of choice to see if they offer these fantastic philanthropic income strategies.
Most agents are going to try and sell you an income rider, and hope that you believe the high % is actually yield. It is not. Income riders are separate stand-alone benefits that you can attach to a deferred annuity at the time of application. They are typically offered by most load variable and indexed annuities. Income riders are monopoly money and a phantom account that can only be used to calculate an income stream. It’s a separate ledger that you can NOT peel off the interest, transfer, or get to the lump sum. It can only be used for income payments.
With those facts in place, income riders are another way to plan for “Income Later” needs. As with all annuity strategies, they are commodities that should be shopped for the highest contractual guarantees.
So when you hear the word annuity, after you throw up….remember that they were put on the planet for income.
Carpe ‘annua’ diem. Annuity translation. Seize the highest contractual guaranteed income by shopping all carriers. Hail Annuity Caesar!