It appears that the Romans invented the concept of annuities around AD 222, so I'm always puzzled by how many people just don't understand them.
Today, however, it seems that they are back in the spotlight. The once lowly and misunderstood deferred-income annuity (DIA) is finally getting its moment in the sun, as well as in clients' retirement income plans.
Many people know that there are different types of annuities; like fixed or variable, but after that, almost no one other than insurance agents has a clue as to how they work.
As with most products, there are good ones and not-so good ones.
The deferred-income annuities started as a variation of the single-premium immediate annuity (SPIA). A client puts down a lump sum and receives a stream of income in return.
According to a recent article in Investment News, there's no denying DIAs' run-up over recent years. In 2011, they posted $211 million in sales, according to data from LIMRA and the Insured Retirement Institute. That number had risen to $2.2 billion by 2013, and Joe Montminy, assistant vice president of the LIMRA Secure Retirement Institute, estimated it would hit $2.7 billion to $2.8 billion for last year.
These annuities also won more legitimacy in 2014 as academics and lawmakers embraced them. The treasury department produced guidelines for the use of qualified plan dollars within deferred-income annuities, thus creating the qualified longevity annuity contract. QLACs are exempt from required minimum distributions, so clients can wait beyond 70.5 to begin taking income from them. And, last fall, in another piece of guidance, the treasury outlined how DIAs can work within target date funds.
Another driver of DIAs' growing popularity: Many years ago, early versions were unappealing because clients turned over their cash and got nothing in return if they died before receiving income. Today's newest products come with optional death benefits, very attractive income riders, and even potential income inflation options.
Wade Pfau, professor of retirement income at The American College, has written that a strategy using TIPS and DIAs can help support a 4.17 percent withdrawal rate in retirement for clients with concerns about the market.
Meanwhile, David Blanchett, head of retirement research at Morningstar Investment Management, wrote a paper in October on using DIAs within the framework of a defined-contribution plan and as a component of target date funds.
In his research, Blanchett concluded that the average optimal allocation to deferred-income annuities was 30.52 percent of the investor's total portfolio at retirement. What percent of your portfolio is in annuities?
The treasury and labor departments have paved the way for wider use of DIAs with target date funds in 401(k) plans, but it will take some more time for plan sponsors and manufacturers to get comfortable with them in that context.
This is when I start to chuckle. It's only taken the government a few thousand years to figure out that annuities can actually be a great thing for people wanting to retire comfortably. Not having to run out of money because the stock market has crashed is really a good thing. Glad to see the government looking to the insurance world for answers, rather than only trusting Wall Street.
If you would like more information about how one of the many annuities might work for you; give us a call. Remember, there really is something special about the newer products available today.