Is This a Good Time for SPIAs?
With traditional pension plans fading away, many advisors find single-premium immediate annuities to be a good planning alternative. After all, so-called SPIAs offer a rather straightforward proposition: Fork over a lump sum to an insurance company and get a guaranteed income stream each month for life.
Still, like most annuities sold in the U.S. today, people typically have to be OK with losing access to a big chunk of their savings and getting incremental payouts stretched out over long periods of time. That can be a hard sell, says Mark Wilson, chief investment officer at Tarbox Group in Newport Beach, Calif., with $450 million under management. “The trade-off is that if clients decide later they need to cover a big expense — like buying a car or helping their kids out financially — that insurance money won’t be an option,” he says.
Still, Wilson sees advantages to SPIAs over more popular variable annuities that come with a bucket of underlying funds. “Variable annuities are designed to provide tax-deferred growth, not a steady stream of income protection,” he says. Also, the FA finds that VAs can impose tax complications for heirs because these vehicles don’t usually receive a step-up basis to minimize capital gains.
Another popular insurance product offering fixed payouts is deferred annuities. But that calls for couples to invest up front in plans that typically don’t kick in for years to come, according to Mike Busch, president of Vogel Financial Advisors in Dallas, which manages about $300 million.
“Since payments might not start until clients are in their mid eighties, we generally find deferred annuities to be better ways to build principle over time in a tax-deferred manner,” he says. “They’re not really designed to provide a steady stream of immediate income.”
As part of a broader retirement plan where clients are worried about outliving their savings, SPIAs in small doses can prove to be effective tools to fill in those gaps, says Jonathan Duong, an advisor at Wealth Engineers in Denver, Colo., who works almost exclusively on retainer. “SPIAs can do a fabulous job of guarding against longevity risks,” he says, “but we find it’s important to make sure people realize all of the trade-offs that come with buying this type of insurance.”
Recently, Duong started talking about SPIAs to a couple who are approaching retirement. Both work as senior engineers at companies offering traditional defined benefit pension plans. But even with such steady income and Social Security built into their financial plan, Duong figures they’ll still fall about 30% short of covering all of their projected household expenses.
While Duong plans to talk more in the future about ways to cut some waste from the family’s household budget, the advisor still sees a need to create a reliable stream of income to cover essential needs. As a result, he’s putting SPIAs on their radar — though he isn’t recommending they jump in right away.
Rather, because each spouse is relatively healthy and it can take 15 to 20 years before the principal is earned back, Duong would like the couple to wait as long as possible to buy coverage. “Generally, it makes the most sense for people to wait to buy SPIAs until they’re at least in their early seventies,” he says. “Otherwise, they’re running the risk of not maximizing their payouts.”
Another reason that clients might want to wait is today’s low-yielding environment, says the Tarbox Group’s Wilson. Current rates are significantly lower than they were just a few years ago. “Even for clients who now look like a good fit for SPIAs,” he says, “we’re recommending they wait for more favorable market conditions.”