In my column last month, "An Unattractive Proposition," I outlined some of the reasons I believe clients do not seem to care for immediate annuities nearly as much as economists do. I received quite a few emails, and I thought I would share some of the "Yeah, but ..." comments I received with readers of Financial Advisor.

"Yeah, an annuity buyer disinherits their loved ones but for some that is fine, and no one has to put all their assets in one anyway."

Duh. Leaving an inheritance of any size to anyone may or may not be important to a particular client. Some people have no family or friends or causes to support. Others don't put these parties high on the priority list. Annuitization may indeed be at least part of their future.

I think most financial planners have heard some clients say that their goal is to have their last check, the one to the undertaker, bounce. Another common sentiment is that IF there is anything left over, sure, give that to the kids.

I delve into this every time it comes up and, without fail, the motivation behind these statements is that the clients want to enjoy their remaining time on earth more than they feel the need to leave something for heirs. They spent the first part of their life making money, now they want to spend their money over the rest of their life.

The steady checks from immediate annuities fit into this pretty well. However, their irrevocability, lack of flexibility and access to funds, and legacy of zero turn clients off. While immediate annuities are excellent at providing steady income, they are spectacularly bad at most everything else, so even a partial annuitization can be hard to implement.  

When clients compare what they will get with an annuity to what they think their longevity odds are, the annuity doesn't look very good. I used the example of a low-cost contract that paid 5.6% of the purchase price for the joint lives of two 65 year olds. They won't even breakeven unless one of them lives to be 83 and after 30 years (age 95), the pre-tax investment return reaches only 3.74%.

If longevity is a real concern, paying to insure against that risk is more sensible. However, statistically, it is a simple fact of life and product design that most people are not expected to live long enough to make the insurance cost a great value.

The people I most often see pushing the idea of annuitizing are not insurance agents, but economists. They view the conversion of assets into income streams as a benefit to a society that has an underfunded and ill-equipped populace, particularly for workers with modest accumulations. This has a behavioral finance and a societal benefit angle I touched on in "Economist Love Them, Clients Hate Them" (February 2012 online column/March print edition).  

"Yeah, immediate annuities aren't that good a deal, but longevity insurance is another matter."

Indeed.

First « 1 2 » Next