Income Annuity Decision: Start Now or Wait Until Later?

Abaris sells both flavors of income annuities, and Carey, also quoted in the Times column, sees uses for both–although Abaris focuses mainly on deferred income annuities, which require less upfront investment, and specifically target longevity risk.
“If you’re 65 and retiring, think of SPIAs as a pension replacement,” Carey says. DIAs, on the other hand, offer tail-risk longevity protection. With a SPIA, the biggest drawback is simply that it takes a large amount of assets to get meaningful income, he adds.
“I haven’t had many clients buy a SPIA to cover all their fixed expenses unless it has represented less than 30% of their portfolio,” he says.

“The reality of today’s interest rate environment is that getting $50,000 in pre-tax income for a 65-year-old male requires $725,000,” Carey says. “And unless the client’s sole goal is not running out of money, it’s difficult to justify that allocation unless the individual has at least $2 million, based on some of the Monte Carlo work I’ve seen.”

Tomlinson counters that the single premium immediate annuity investment doesn’t have to be large–at least not as a percent of total assets.

“I find that after delaying Social Security, it is feasible to cover basic living expenses without a huge SPIA purchase,” he says.
Indeed, in the projection we worked up together, the couple spends $298,000 on a single premium immediate annuity at age 70–less than 30% of the original $1 million portfolio–and they still have $416,000 remaining liquidity.

Income annuities have been getting more attention lately as a growing number of retirement researchers–and consumers–train their attention on the problem of longevity risk. At the same time, the U.S. Department of Labor’s fiduciary rule has put pressure on other guaranteed income products like variable annuities, which usually are more complex and expensive. (This topic gets a full airing in Morningstar’s recent Retirement Readiness Bootcamp on how to maximize guaranteed income in retirement.)

But income annuities still represent a very small part of the overall retirement market. Sales in 2016 for immediate and deferred annuities totaled an estimated $12 billion, according to LIMRA, the industry consulting and research firm.

DIA sales have been rising briskly for the past five years, but the overall income annuity market pales in comparison with the $7.3 trillion held in IRAs at year-end 2015, and $6.7 trillion in workplace-defined contribution plans, according to the Investment Company Institute.

DIAs have been around since the mid-1990s, but only began gaining traction in 2012, when insurance companies began to market them as a way to build your own pension, says Judy Zaiken, corporate vice president and research director at the LIMRA Secure Retirement Institute.

Indeed, just 25% of today’s workers expect a traditional pension will be a major source in retirement income, according to the Employee Benefit Research Institute’s latest Retirement Confidence Survey.

Recent LIMRA research on DIAs and SPIAs shows that DIAs attract younger buyers–the average DIA purchase age is 59, compared with 72 for SPIAs.

DIAs received a boost from the Obama administration in 2014, when it approved rules for offering qualified longevity annuity contracts within 401(k)s and IRAs. QLACs ease the path to DIA purchases in tax-qualified accounts by excluding their value from required minimum distribution requirements. The idea here is to buy a QLAC near or at retirement, with payments starting only if the buyer reaches an advanced age, say 80 or 85. Hence, they are intended to be longevity insurance.

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