Iíll pass, thank you. Looking at some of the changes in the marketplace lately, weíve seen the introduction of more low-cost annuities. Will that change your view on using them in a portfolio?
Orecchio: Costs are a drag in any investment, so the more you can minimize that cost, theoretically the better the performance will be, all other things being equal ó so itís very important for us. If we can control the cost, we give more back to the client.
Roth: We can disintermediate the insurance company and the agent, and build our own annuities ó for instance a TIPS ladder with a 20-year DIA later on, which minimizes that insurance, and even an equity-indexed annuity, now rebranded as a fixed indexed annuity.†
Blanchett: Annuities are a form of insurance, and insurance is not a positive net present value vehicle. You shouldnít expect to make money from insurance on average, but what annuities do is hedge against a really bad event happening. If you look at a Monte Carlo simulation from the lens of what is the worst one in 10 possible outcomes or the worst two in 10, those different percentiles, thatís where they really shine ó because they show that regardless of what happened with the market, youíre going to be OK at some level.
Foss: You have to remember, too, that annuities are just transferring the risk to an insurance company, so youíre going to pay a price for that. Sometimes that price is actually a value-add for the advisor and for the client, just to have that and know that. A lot of times the clients want that. Meanwhile, I think the free markets are at play and youíve got demographics and youíve got taxes, and I think thatís going to push more competition.
Orecchio: I would agree that there will be more demand, but our experience is that investors donít buy annuities so much as theyíre sold them, because theyíre a complicated product that people donít understand. They certainly donít want to talk about their death or their longevity; itís just not a topic people are comfortable talking about. As a result, I think thereíll always be a place for the agent to do the explaining, plus the insurance world is fraught with a lack of transparency.
Blanchett: Thatís why Iím a fan of simplicity, if you can get it. A SPIA is very simple, relatively easy to compare. Some of the more advanced products, like variable annuities, they can be great for clients but itís really hard to compare them apples to apples. With a SPIA, you know the payout and the quality of the issuer; thatís about all you need to know.
Itís been argued that the best single premium immediate annuity a client can buy is to delay Social Security benefits. Allan, since youíre a proponent of that, please elaborate.
Roth: I priced out a couple delaying Social Security for four years versus what they could buy, a deferred annuity that started in four years, and itís like buying it at almost half price. Itís backed by the U.S. government, and rather than a fixed percentage increase, itís a CPI-U percentage increase. Itís not a close call.
Blanchett: There are tax benefits, there are survivor benefits. Social Security is the best ó I donít want to call it this ó but itís the best investment around today, in my opinion.
Orecchio: Iím in total agreement. The only thing I would hedge is you have to weigh the clientís longevity and family history because delaying means thereís a crossover point down the line where it made sense to delay. If they donít reach that crossover, though, then obviously itís money out of their pocket, so you have to take their health into consideration.
Blanchett: I get that, and Iím a big quantitative guy, but just to be honest, if you pass away and youíre 75 years old, your kids are probably going to be OK, right? I think it makes sense to do those kinds of net present value calculations, but true risk in life is not about maximizing the estate to your heirs when youíre 70; itís having nothing or having to have them take care of you when youíre 85, 90 years old.
Scott Wenger is group editorial director of Financial Planning, On Wall Street, Bank Investment Consultant and Money Management Executive. Follow him on Twitter at @ScottWengerFP.