Annuity Ratchet? with 20 Characters

[somarco]

Talking with a guy, age 63, wife, 58 weighing buyout option.

$3400 for life (annuity) or $740k lump sum

How much is the annuity costing you?

Nothing. We get $3400 for life. When one of us dies the annuity payout ratchets up to a single life payout.

Really?

Not familiar with this type.

Survivor annuities I have seen either drop or, if a period certain, remains level until the period runs out.

 

[Tahoe Ray]

Talking with a guy, age 63, wife, 58 weighing buyout option.

$3400 for life (annuity) or $740k lump sum

How much is the annuity costing you?

Nothing. We get $3400 for life. When one of us dies the annuity payout ratchets up to a single life payout.

Really?

Not familiar with this type.

Survivor annuities I have seen either drop or, if a period certain, remains level until the period runs out.

That exists in the pension world and I've seen it a number of times.

It is normally called a "pop up" and there are variations as to how they're structured but most I've seen will provide a joint lifetime payout that steps up to single on the death of the benficiary...not of the pensioner (it would remain at the lower payout if that happened).

 

[somarco]

Thanks.

I think this guy is mostly playing with me. Haven't got a good read on him.

He currently has a big bank consultant type handling his investments.

So why did he ask me?

He says he wants to talk to someone that does not have a vested interest in trying to sell him something.

Right. Let me tell you how I earn my living.

Now, if I can give you an idea that seems plausible, and no one else has suggested it, can we talk on a serious level?

Sure.

So I presented the idea of life insurance (he says he is healthy) vs the annuity. Threw out some numbers, mentioned life proceeds are tax free, blah, blah without giving too much away.

He has enough life insurance and just wants to protect his assets against inflation.

So I threw this out just to see if he would bite.

Inflation isn't a concern for most people. The bigger challenge is living too long and/or having the ability to pay your health care costs without liquidating your assets.

His response was, "I have that covered"

So this is a dead duck to me. It has been 30 years since I worked in the qualified plan area and had never seen an annuity that operated that way.

 

[scagnt83]

Ray is correct. They exist in the Pension world, but not on the public market.

That is not a bad payout at all. It is basically even with a joint life payout on a publicly available SPIA right now.

If he used life insurance he would have to pay taxes before funding the policy...

I would talk interest rates and explain how they affect annuity payouts. If 10 year rates are 1% higher in a year or two it could mean an extra $500 to $1k per month for his income if he waited to start annuity payments.

So I have been recommending that clients use a "wait and see" strategy for creating an annuitized income. He could take 10% free withdrawals from a regular deferred annuity and assuming a 1% bump in 10 year yields, even with the lower lump sum a SPIA would give a greater income in 3 or 4 years.

So try that method and recommend a 4 year MYGA (2% with Guggenheim) or a 6 year FIA (American Equity, Choice 6 product). Then once rates are higher rollover to the SPIA.

 

[Tahoe Ray]

I don't understand how taking the annuity would protect his assets from inflation.

The annuity rate is very good, but the lump sum is really attractive too.

If he only earned 5% on that money, he could theoretically have it last over 47 years. 4% would still get his wife past 90.

Also, he would have four key benefits for taking the lump sum.

1) Control
2) A better chance of keeping pace with inflation
3) The ability to take more than 3400/mo if he needed it (short term of course)
4) There would likely be some money left over for beneficiaries.

I would turn this around on him. Ask him if he had 740k sitting in a brokerage account right now and you purposed this plan (roughly 3400/mo for both lives, nothing after that) would he do it? Would he write the check and say goodbye to the money in exchange for this income stream?

His answer will let you know how serious he is and if this is a real potential case or if he's just wasting your time.

 

[scagnt83]

I agree with Ray about the inflation aspect. Unless his payout is increasing each year for inflation (at that amount it is unlikely), then inflation would be a big risk with that method and at his age. It is very likely that either him or his wife will live to see prices double (or close to it) what they are now...

To fight inflation imo the best way would be the wait and see method that I mentioned. A higher payout would fight inflation.

 

[somarco]

If he used life insurance he would have to pay taxes before funding the policy...

And his annuity payout is taxable too. What am I missing?

Yes, the annuity is not inflation proof, but neither is a portfolio of mostly bonds (as his adviser is recommending).

I still see cost of health care as a major consideration. A decent SNF can run $30k per month. Two yrs in a nursing home can pretty much wipe out his lump sum.

Thanks for the banter. He pretty much blew me off as "just another insurance peddler" so I don't think these ideas will work with him. But who knows? In another 20 years I might come up with another person in a similar situation.

All I have to do then is remember where this thread is.

 

[scagnt83]

And his annuity payout is taxable too. What am I missing?

Yes, the annuity is not inflation proof, but neither is a portfolio of mostly bonds (as his adviser is recommending).

I still see cost of health care as a major consideration. A decent SNF can run $30k per month. Two yrs in a nursing home can pretty much wipe out his lump sum.

Thanks for the banter. He pretty much blew me off as "just another insurance peddler" so I don't think these ideas will work with him. But who knows? In another 20 years I might come up with another person in a similar situation.

All I have to do then is remember where this thread is.

Sometimes those lump sum settlements can be transferred into an IRA and kept as Qualified dollars... at least that is what I have been told in the past. I have never handled one personally on either side of the equation so dont quote me on that.

 

[Stephen]

Sometimes those lump sum settlements can be transferred into an IRA and kept as Qualified dollars... at least that is what I have been told in the past. I have never handled one personally on either side of the equation so dont quote me on that.

I have done quite a few of these. You just open an IRA and have the settlement check written as an fbo and it isn't a taxable event.

 

[Tahoe Ray]

I have done quite a few of these. You just open an IRA and have the settlement check written as an fbo and it isn't a taxable event.

Same here. It is normally a pretty straightforward process.