My wife and I are peculiar. No, we aren’t cult members, nor do we wear parkas in the summer or make art out of lint—not that I’m passing judgment on any of those things. It’s more about not feeling compelled to do something because everybody else is doing it or the obverse, which is doing what we think makes sense, even if few others think so.
Case in point is buying an annuity. We’re among the minority of Americans (maybe 10%, according to estimates) who own an annuity. Ours is a single-premium immediate annuity, or SPIA. Rarer still, we’re among the fewer than 5% or so of annuity owners that LIMRA estimates annuitize. We never agonized about forking over a wad of money in exchange for forever income, never regretted our decision and continue to be delighted every first of the month when the electronic transfer hits our checking account.
Many advisors reading this would undoubtedly agree that we’re peculiar. But even if having annuity income in retirement hasn’t removed every last shred of our FORO (fear of running out), it continues to provide great peace of mind and has made spending decisions in retirement a lot easier.
Those outcomes are precisely what Tamiko Toland stresses when she talks about where annuities fit in retirement planning. Tamiko calls herself the Annuity Yoda, and her expertise in the opaque, jargon-ridden and mind-numbingly complex world of annuities—with a specialty in the even more confusing subfield of annuities within qualified retirement plans—certainly merits her unique sobriquet. More important in terms of credibility is that she is an independent expert.
I met Tamiko when we worked for the same publishing company. I was the editor of On Wall Street, one of the precursors of WealthManagement.com, and Tamiko ran Annuity Market News. After many years spent researching and writing about retirement income, annuities and qualified plans for firms including Strategic Insight, CANNEX and TIAA, where she was head of lifetime income strategy and market intelligence, Tamiko went out on her own and founded the 401(k) Annuity Hub, a market intelligence service for plan fiduciaries exploring lifetime income within 401(k) plans. She is also a co-founder and CEO of IncomePath, which has developed a tool and process to help financial professionals monitor retirement income planning in a way that is more adaptive and flexible than other approaches.
I recently spoke with Tamiko about why so many advisors don’t like annuities, why most retirees who have them seem to love them, and why annuities often are so complicated. Instead of presenting our talk in the usual Q&A format, I thought I’d highlight some of her most interesting points and share her thinking.
No Product or Investment Other Than an Annuity Offloads Longevity Risk and Guarantees Income
Advisors who rail against annuities can’t offer anything that truly replaces them, she says. As I like to say to the horror of compliance people, buying an annuity is like buying your own pension. It provides guaranteed income for life—unlike investments outside an annuity wrapper that may be able to generate higher income (or not). I doubt that even ardent annuity foe Ken Fisher would be willing to guarantee his clients’ income for life, but insurance companies are.
There Is No Such Thing as an “Annuity”
“There are many kinds of annuities, which can become very confusing. Academically, we tend to talk only about SPIAs. The reality is that if you add a living benefit, many kinds of annuities—variable annuities, fixed indexed annuities, RILAs—can act like SPIAs, because there is a floor guarantee of income. But that adds a layer of complexity on top of the complexity of each different product type. As a result of the complexity and variety of products, it’s no wonder that advisors don’t feel they have the comfort they need to give good advice to their clients, or the necessary comfort with the products themselves.”
“It’s possible to kind of get around the complexity by sticking to SPIAs, and while there are not a lot of fee-only SPIAs, the easiest way to get around the issue is to find the best rate and then rebate the client the commission. That’s what some advisors practice.”
In Retirement, Advisor and Client Interests No Longer Align
Before retirement, when clients are trying to grow assets, advisors and their clients are on the same page. “But once you start de-accumulating in retirement,” Tamiko says, “the client’s interest is to spend the money.” To fee-based advisors, of course, that means a loss of income.
“I’m not saying that I think the change makes RAs unethical,” she says, “it’s just that the underlying premise of aligned interests starts to fall apart when you start considering retirement.” But she notes that annuitizing a portion of a client’s portfolio in retirement can actually work to an advisor’s benefit.
“Annuitizing conserves remaining assets because the client is not having to spend down as much from the portfolio. It also frees the client and advisor to invest more aggressively, because the annuitized income replaces part of the fixed income portfolio,” she said. Importantly, annuities give clients the psychological “freedom to spend,” because they become less worried about running out of money and hording their accumulated savings.
Advisors Should Focus on Lifestyle Planning for Retirees, Not Just Financial Projections
Tamiko’s key point is that the real issue for advisors in helping clients plan for retirement is that lifestyle planning is just as important as financial planning because the two are intertwined. Ask clients how they are going to get satisfaction. What activities will they be doing? Volunteer work or working for pay? Does work satisfy them, or do they work because they need the money?
She believes that social connection is very important for retirement satisfaction and longevity. “Obviously, having enough money to pay for healthcare is essential, but it’s also important to invest in social relationships with peers, with younger people, with your family and others. Those investments may take relatively small amounts of money but should be part of the plan. This is the kind of planning and thinking that advisors ought to help with, because lifestyle goals change over time.”
Tamiko says the surprises that inevitably arise in retirement are often cushioned by having an annuity. “Shocks are one of the reasons advisors who sell annuities love them. Clients who have guaranteed income are much less concerned and often completely unworried when things go wonky,” she said. For advisors, annuities tend to strengthen relationships because clients are better prepared to deal with the adverse financial and economic situations that are certain to happen during retirement.
One Last Point
“People love the security of having an annuity. They don’t want to hear that there is a 15% chance that their plan is going to fail. If you’re not going to serve people who want that kind of security, another advisor will.”
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