Jason Parker discusses the Single Premium Immediate Annuity with guest Stan The Annuity Man.
Stan The Annuity Man is a nationally recognized annuity expert, and annuity critic. He has been called the national consumer advocate for annuities. Stan The Annuity Man is a weekly RetireMentor columnist for The Wall Street Journal’s MarketWatch.com, and is the exclusive annuity contributor for About.com. His highly acclaimed book, The Annuity Stanifesto, is a top seller in its category and is known as the go-to-resource for all things annuity. Stan The Annuity Man has clients nationwide and is considered the top independent annuity agent in the country.
Learn more about Stan: www.stantheannuityman.com
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Below is the full transcript:
Speaker 1: Welcome back America to Sound Retirement Radio where we bring you concepts, ideas, and strategies designed to help you achieve clarity, confidence, and freedom as you prepare for and transition through retirement. Now here is your host, Jason Parker.
Jason: Seattle, Tacoma, Olympia, Gig Harbor, all the good people right here in Kitsap County and for those of you tuning in from around the country via iTunes or listening via podcast, thank you so much for making Sound Retirement Radio one of the top destinations for retirement advice in the iTunes library. Do a search for retirement today there and you’ll find our podcast is one of the top search results. We appreciate you making this program your place for expert advice. You’re listening to episode 054. Today we’re talking about single premium, immediate annuities: what you need to know before you purchase one. We’re going to really dive deep here.
Before we get started on today’s program, I have a couple of things I’d like to share with you. As always we want to start your morning off right and I’ve got a fun joke that I’d like to share with you. Here it is: what do you call a bear with no teeth? A gummy bear. All right. Let’s renew our minds real quick here this morning. I’ve got a verse from Proverbs chapter 13, verse 3. “Those who control their tongue will have a long life. Opening your mouth can ruin everything.” I had to learn that one the hard way. Oh, man. Why didn’t someone teach me that when I was younger? “those who control their tongue will have a long life. Opening your mouth can ruin everything.”
All right. With that, let’s get into this episode. We’re going to talk about the single premium, immediate annuity. As you know, I’m always looking to bring experts onto this program who can add significant, meaningful value to your financial life as you’re preparing for and transitioning through retirement. Today I have the good fortune of having Stan the Annuity Man, who is a nationally recognized annuity expert and annuity critic back on the program. Stan the Annuity Man is a weekly [retire-mentor 00:02:15] columnist for the Wall Street Journal’s MarketWatch.com and is the exclusive annuity contributor for About.com. His highly acclaimed book, The Annuity [Stan-ifesto 00:02:26], is a top seller in its category and is known as the go-to resource for all things annuity. Stan the Annuity Man has clients nationwide and is considered the top independent annuity agent in the country. Stan the Annuity Man, welcome back to Sound Retirement Radio.
Stan: Glad to be back in the Northwest. Calling from Florida, but I like being in the upper-Northwest. It’s too hot down here.
Jason: Boy, I tell you we’re having Florida-like weather this summer. This has been really incredible. A lot of fires unfortunately burning around here these days.
Stan, this is a big one. The single premium, immediate annuity. People in the academic world love this type of contract. Why don’t we start out just by having you explain to our listeners what is a SPIA, single premium, immediate annuity, and how does it work?
Stan: Well it started in the Roman times. These are the original annuities and the only annuity type that was sold in the United States up until 1952. An immediate annuity is an actual pension. It’s a personal pension. If you give the money to the insurance company and they guarantee a lifetime income stream regardless of how long you live, it’s an actuarial bet between you and the insurance company because all annuity payments are based on your life expectancy or life expectancies if it’s joint at the time you take the payments. Immediate annuity is the most simplistic form of lifetime income guarantee that you can get. There’s no annual fees. There’s no moving parts. There’s no upfront bonuses. There’s no [income-riders 00:03:58]. This is the highest contractual guarantee that you can get. You can defer it for as long as 1 year, but in most cases people buy them and the first income payment arrives 30 days from when the contract is issued.
Jason: That’s the SPIA. The other thing we’ve been hearing more about these days are the deferred income annuities, the DIAs, the DIAs if you will. Go ahead and tell our listeners, explain just real quickly what a deferred income annuity is compared to a single premium, immediate annuity.
Stan: SPIA has a cousin and that cousin’s name is DIA. Deferred income annuity pretty much functions like an immediate annuity except for the fact that you can defer the deferred income annuity as far out as 45 years in some cases. For immediate income needs, what I call “income now”, immediate annuities, single premium, immediate annuities are the best, most efficient, highest contractual guarantee you can get. For income later or target data income like, “I want income to start 7 years from now or 10 years from now or 8 years from now,” deferred income annuities which function just like immediate annuities is a deferred pension, no moving parts, no annual fees. It’s a straight transfer risk where the carrier that issues the product guarantees to pay you for the rest of your life.
One of the things that people think about immediate annuities or deferred income annuities or annuities in general is that if you die the evil insurance company keeps the money. That is only true if you set it up life-only. With most of the annuity guarantees that we set up for lifetime income, we set it up to where if you unfortunately passed away early in the contract, 100% of the unused money goes to the listed beneficiaries and the annuity company does not keep a penny.
Jason: I’ve found, when talking to people about retirement planning, when you bring up the term annuity, this is what most people think of; they think of the single premium, immediate annuity, a pension that’s going to pay for the rest of their life, and if you die early, there’s a concern that your beneficiaries aren’t going to receive anything. In your experience, how often do people actually elect that option of the life-only versus a period certain or some kind of return-of-premium option?
Stan: I would say 5% of the time. Arguably, I sell more immediate annuities than anyone on the planet. 5% of the time you have the person that either understands the mortality credits, and what that means to the people listening is just the life expectancy tables. The higher payment on the annuity side when you do an immediate annuity structure is life-only because you’re shouldering some of that risk. Life-only would provide you the highest contractual payout. Those are the people that choose it. I have clients … One of the leading insurance professor from Wharton, is a school in Pennsylvania, he buys life-only annuities I guess because he’s a math genius and that’s what he wants to do. Most people have worked very hard for their money. They want to make sure that 100% is going to go to somebody in their family if something happens to them early in the contract and they’re willing to give up a little bit of the guaranteed payout to be the highest to have that guarantee contractually so that 100% of the money stays in the family.
Jason: You’ve got this reputation of being a critic of annuities. Obviously, you throw this word out there, annuity, and people kind of lump them all together. There’s obviously good, bad, and ugly in everything. When we’re talking about the single premium, immediate annuity, help our listeners understand the advantages and disadvantages of using a contract like this.
Stan: Sure. The advantages is that’s going to provide the highest contractual payout. Single premium, immediate annuities will contractually beat every single other annuity type, all 15, if you need income now. If someone’s trying to sell you a variable annuity and turn on the income stream now or an indexed annuity and turn on the income stream now, they’re just trying to buy themselves a car or go on a trip to Bora Bora and drink for free. If you tell the agent or advisor, “I need income now and I want the highest contractual guarantee,” they have to show you an immediate annuity.
Now, what are the limitations? All annuities have limitations and benefit propositions. The limitations to immediate annuities is it’s irrevocable. Once you turn on that income stream, think of ripping off the knob off a faucet and the water just keeps coming. There’s nothing you can do. In other words, that income stream’s going to continue regardless of how long you live. There’s no liquidity. You can’t call up the insurance company and say, “Shut that income off.” Immediate annuities are irrevocable, lifetime income streams that you can never outlive.
Jason: It’s guaranteed pension. Should people hate annuities? You see there’s one particular investment advisory firm that’s always running ads these days that says, “I hate annuities and you should too.” Should people hate annuities?
Stan: You should hate how they’re being sold. You should hate how they’re not being regulated. You should hate most agents. Annuities are transfer risk products so they are not investments. They should not be purchased for market growth. They should not be purchased for hypothetical, theoretical, back-tested, projected numbers. They should be purchased for the transfer risk guarantees that they provide.
I use a simple acronym called PILL. P-I-L-L. P stands for principle protection. I stands for income for life. L stands for legacy. The other L is long-term care. If you don’t need to sell for one or more of those things, you don’t need an annuity. Notice there’s not growth in there. If you want market growth, don’t buy an annuity. I know the index annuity guys and the variable annuity guys just ran their car off the road, but that is the truth. By the way, indexed annuities were designed in 1995 to compete with CD returns so all of this nonsense that you’re hearing on TV and radio is just that: nonsense. It’s a CD product. You can’t attach income guarantees to it. If it sounds too good to be true with annuities, it is every single time.
The reason I look so angry on all of my books is that these are good products and they have a unique value proposition that no other product can provide which is lifetime income. However, the annuity industry does not regulate the sales message and the bar is very low to qualify to sell these products. In most cases, for instance, index annuities you can get your license in one week to sell them.
Jason: I was going to say you do really look angry on the cover of your book in a lot of the stuff you’re doing out there. I’m glad you brought that up. I understand your frustration. There’s a lot of people out there giving bad advice. That’s why we’re doing this program. We want to educate people. We want them to make good decisions. One of the concerns you always hear with annuities is the fee structure. Talk to our listeners about fees, specifically as they apply to the single premium, immediate annuity contract.
Stan: Single premium, immediate annuities have no annual fees. Now all agents that sell annuities and life insurance products, those people are going to get paid a commission, but commissions are built into the product. Now I will tell you this; that immediate annuities have the lowest commission structure. Period. Why? Because they’re simple. The more complex the product, the higher the commission, the longer the surrender [inaudible 00:10:59] period, the higher the commission. Single premium, immediate annuities, if you put $100,000 in one, you’re going to see $100,000 go to work. Yes, the agent did get paid a very small commission out of the company’s reserves, but from an annual fee standpoint, you’re not going to see anything deducted from your account. You’re just going to see a contractual, guaranteed payment.
Now, it’s very important to understand that immediate annuities are annuitized products and what that means, Jason, is that it’s a combination of return of principle and interest. Outside of an IRA structure, that income stream is going to come to you tax beneficial from the standpoint of the return of principle is not taxed. The interest will be taxed. A lot of that income stream is going to be tax-free coming to you. Now if it’s inside of an IRA, IRA taxation rules apply.
Jason: I think that’s a great point. The term that people can look up there is the exclusion ratio. If it’s non-qualified money, one of the nice things about that income stream that you just made a very good point on is that it’s really tax-efficient income for them because not all of it’s counted as interest. The other big concern with this type of a pension annuity is inflation. People will say, “If I annuitize my money, if I turn it into an income stream, I’m losing purchasing power over time.” How do you address that concern?
Stan: They are correct. It’s really that simple. There’s not an annuity on the planet that really addresses inflation. You can attach, at the time of application, what’s called a cost-of-living adjustment increase. They call it a COLA or consumer price index increase, meaning that it’s going to increase by a certain percentage for the life of the policy. On surface, that sounds fantastic. Why wouldn’t I do that? Well insurance companies have the big buildings for a reason. They don’t give anything away so if you bought a single premium, immediate annuity with a COLA increase, all the insurance company’s going to do is lower that initial payment when compared to the exact same annuity without a COLA. They’re not giving anything away for free. In most cases when people say, “Stan, quote me an immediate annuity,” I show them both the same annuity with and without a cost-of-living adjustment increase just so they can see the lowering of that initial payment amount.
From the standpoint of inflation, like I just said, there’s nothing that tracks it perfectly. What I tell people with annuities, the way to use annuities to combat inflation is to have annuities starting at different time frames. If you’re 65, you might have an annuity starting now, then set one up to guarantee to start when you’re 70, and then 75, and then 80, and then 85. Staggering the income start dates is the best way to attack inflation using annuities.
Jason: When you meet with people, when they contact you, what, would you say, is their primary reason for contacting you? What is it that they’re trying to accomplish?
Stan: Too often people are just scared and they’re scared of the market, scared of a typical downturn in the markets, and they’re overreacting or they’ve gone to a bad chicken dinner seminar and heard something that sounded so good that they need me to just kind of ground them and tell them the truth about the product. Most of the calls I get are that or, “Stan, I saw this ad on TV. It said that they can guarantee me 8%. How is that possible when the [inaudible 00:14:17] treasury’s at 2?” Most of the calls, I’m trying to educate people on the too-good-to-be-true pitch. The sad part are the calls that I don’t get, the people that are buying these products thinking that they’re getting Jimmy-Carter-like yield when in essence, they’re just getting a monopoly money phantom account that can only be used for income. Those are the calls that I get.
When people call, there’s only two questions that they need to ask themselves and answer to see if they need an annuity. Number 1 is what do you want the money to contractually do? Number 2: when do you want that to happen? From that, we’ll go backwards and find the best contractual guarantees on the planet from all the carriers because in my world you buy an annuity for what it will do, not what it might do. The contractual guarantees which turns these products into commodity products, which means let’s just go find the best contractual guarantee for your situation.
Jason: You see a lot of conflicting advice out there. Some people say you should hate annuities. Some people love annuities. How can people determine whether an annuity’s really right for their situation?
Stan: First thing, annuities are not growth products so if market growth is what you want, then annuities off the table. Annuities are non-correlated assets in my opinion. They’re non-market assets. They should not be compared to investment because they’re not. They’re transfer risk products. I always tell people it’s hard to judge the ROI on a lifetime income stream until you die. Up until that point, it’s a transfer risk. I just tell people go back to the PILL acronym. P stands for principle protection. I stands for income for life. L stands for legacy. The other L is long-term care. Annuities can contractually solve for those 4 things and transfer the risk to the carrier to solve for those 4 things. If you don’t need 1 or more of those 4 things, you do not need an annuity. That’s one of the first questions. What do you want the money to do? If someone says, “I really want a good return. I want some market return,” conversation’s over. Annuities aren’t the solution. Period.
Jason: Yeah. I remind our listeners that sound retirement planning, and of course folks you can go to soundretirementplanning.com, sign up for the sound retirement planning blueprint. We take you through a 4 step video series to show you different ways to solve retirement planning problems. There’s a lot of different ways to help people accomplish these goals, Stan. Annuities, when structured properly, I believe can help people conservatively create the cash flow and the income they need. Some people really don’t like annuities. They’d prefer to use traditional tools. When I say traditional, annuities have been around a lot longer than stocks, bonds, mutual funds, and ETFs, but some people prefer to use those tools to help them create a retirement plan. Everybody really has to find what’s comfortable for them. Do it the way that you want it done and just make sure you’re getting good education.
One of the things I want to ask you about is the payout ratio because I think sometimes that confuses people. We saw some people recently that they were choosing a deferred income annuity and this was an annuity that was going to provide them income in about 5 years. The payout ratio on that was 9.1% which really looks attractive but some people get rate of return and payout ratio confused. Help our listeners understand a payout ratio on an annuity.
Stan: A payout ratio is simply a translation of your life expectancy in percentage form. The older you are, the higher the percentage. For example, if you have $100,000 and the actuarial percentage payout is 7%, you’re going to get $7,000 a year for the rest of your life. That’s the actuarial percentage. The older you are, the higher the percentage. It’s just a way for the insurance company to put a number and a percentage and be able to calculate the initial payment amount when you turn on the income stream. That’s the actuarial percentage. It’s not yield. When you get that AARP letter in the mail that has 7% on it, you go, “Wow, Jimmy Carter’s in office again.” No. What that is is that’s an actuarial percentage based on a life expectancy, typically a 70-year-old. That’s going to guarantee that initial amount for the rest of your life.
Jason: That’s really important. I think that people understand the difference between a payout ratio and a rate of return. They’re not the same thing. The other thing that we see a lot of people looking at these days are these charitable gift annuities. Have you run across this at all?
Stan: Sure. A charitable gift annuity is an immediate annuity issued by a charity or a nonprofit. If you’re looking for income now, I think it’s very important to look at an immediate annuity, single premium, immediate annuity and charitable gift annuities. Pick a hospital or University of Washington, Washington State, whoever your alma mater is, or Salvation Army; they’re going to offer a guaranteed lifetime income stream payment through their foundation. Now the good news is it functions like an immediate annuity. The guarantees are backed up by the issuing nonprofits. You’ve got to make sure that they’re solvent, but you also can get a tax write-off and a tax benefit for placing the money there. Now, you’re not going to get the money back if you die early. 100% of the money goes to the charity. A lot of the cases, that’s a good thing.
If you’re a [U-Dub 00:19:34] grad or a Washington State grad, you say, “You know what? I need an income stream and if I die they keep all the money and I’m good with that. I’m going to get a tax benefit and a tax write-off for placing the money there. Let me compare the charitable gift annuity with a single premium, immediate annuity and let’s see which one wins and what fits my situation better.” If you’re feeling profit, the charitable gift annuity might be the way to go. You don’t have to deal with an agent. You’re going to deal directly with the nonprofit, hospital, college, et cetera. I love those products. By the way, they’re regulated. There’s a charitable gift annuity association that sets the rates. It’s a good way to create a lifetime income stream and all be feeling [profit 00:20:16] at the same time.
Jason: I guess the only concern I have though when I hear about that because they’re with an insurance company, you’ve got the insurance company backing it. What about if you just have this charitable organization? How do you do your homework to make sure that they are solvent, I guess? What are you looking for there to make sure?
Stan: Good question. I would obviously ask for financials. I would look at their financials. I would have an independent person who’s qualified to assess the financials to make sure that they’re going to be around to back up the guarantee. In most cases, the Salvation Armies, the United Ways, University of Washington, Washington State, [inaudible 00:20:53], these are places that are big, they have large foundations, and they can stand behind those guarantees. I don’t think there’s a lot of risk in those cases.
Jason: All right folks if you’re just tuning in, you’re driving down the street this morning, you’re listening to episode 054. We are talking about single premium, immediate annuities. Everything you need to know before you purchase one. I’ve got Stan the Annuity Man on the program. Stan, there’s probably going to be some people out there, I’m sure we’ve got people listening from all over the country that are going to want more information about the work you do. What’s the best way to contact you?
Stan: You just go to the website: StantheAnnuityMan.com. We do not contact you. We do not chase you. You just get full information. We have written over 400 original articles on annuities for the consumer. You can download books. You can do all kinds of things. Watch videos. It’s very informative. We have quotation systems where you can get quotes without anybody calling you. It’s really a [inaudible 00:21:48] shopper’s dream for annuities. I only look at the contractual guarantee so that’s all you’re going to see.
I was thinking about one more thing, Jason. Single premium, immediate annuities really function to help you build an income floor. Everyone’s going to get social security. If you’re fortunate enough to get a pension, that’s part of the income floor. If you have rental properties or something, that’s money that’s coming in. Immediate annuities really function well when you say, “Stan, if we could just do $1,350 a month for the rest of our lives, that would fill that gap.” It’s a gap filler. It’s an income floor builder. I tell people all the time that are investors, cover the payments with guarantees and then go invest. You’ll be a better investor.
Jason: I think that’s great advice. We only have about a minute left, but I wanted you to share quickly the QLAC and the resource that you now have available for our listeners on that.
Stan: Both QLAC and immediate annuities, I have owner’s manuals available. If you contact Jason, he can mail you those books. They’re for sale on Amazon.
Jason: Are you there, Stan?
Stan: I’m here, Jason.
Jason: Go ahead. We seem to have lost you for a second. Anyhow.
Stan: What I was saying is I’ve written a book: Single premium, immediate annuity owner’s manual. I’ve written a QLAC owner’s manual. QLAC is an immediate annuity for an IRA that you can defer, but both of those strategies I think are simplistic and that people should look at them. These books, you can drop by Jason’s office and pick them up. They’re easy and quick reads.
Jason: All right. Very good. Folks, if you’ve tuned in again, this is Jason Parker with Sound Retirement Radio. We have Stan the Annuity Man on the program. This is episode 054. We archive all of this for you so you can go back and listen at your convenience. I’d encourage you to do so if you’re considering an annuity. Visit Stan the Annuity Man online and get some additional information. Get some good education before you purchase an annuity.
Stan the Annuity Man, thanks so much for being a guest on Sound Retirement Radio.
Stan: It’s been a pleasure, Jason. Thanks.
Jason: Take care.
Speaker 1: Information and opinions expressed here are believed to be accurate and complete, for general information only and should not be construed as specific tax, legal, or financial advise for any individual and does not constitute a solicitation for any securities or insurance products. Please consult with your financial professional before taking action on anything discussed in this program. Parker Financial, its representatives, or its affiliates have no liability for investment decisions or other actions taken or made by you based on the information provided in this program. All insurance related discussions are subject to the claims [inaudible 00:24:30] ability of the company. Investing involves risk. Jason Parker is the president of Parker Financial, an independent, fee-based, wealth management firm located at 9057 Washington Avenue, Northwest Silver Dale, Washington. For additional information call 1-800-514-5046 or visit us online at SoundRetirementPlanning.com.