by John Darer CLU ChFC MSSC RSP CLTC
A diverse collection of safe income producing strategies, including immediate annuities, is important for a comfortable retirement according to Five Ways To Boost Retirement Income, an article by Jeff Benjamin in Investment News (a publication which claims to be "the leading news source for financial advisers"), published September 19, 2010.
"...the best way to ensure enough flexibility to move in and out of riskier assets and strategies is to establish a steady and predictable income stream that will enable clients to ride out a stretch of lean years". Investment News September 19, 2010
The 5 strategies addressed in the article are:
- Immediate annuities, which Investment News dubs "the ultimate in predictable income"
- Individual bonds. The article states "Bonds are obviously a critical part of an income portfolio, but in a rising-interest-rate environment — which is likely over the next several years — individual bonds have a distinct advantage over pooled-mutual- fund strategies. As opposed to bond funds, which are never as nimble as a separately managed and customized bond portfolio, the idea here is to shift the emphasis from risk tolerance to income objectives".
- Reverse Mortgages The article states "While reverse mortgages are still a long way from being the first choice for most retirement income strategies, they do represent an opportunity that is worth considering. One reason reverse mortgages will continue to gain popularity among retired people is that unlike home equity loans or second mortgages, the loans are not structured based on income or an ability to make payments"
- Investment News issues this caveat "On the surface, the idea of enabling older homeowners to convert part of their real estate equity into tax-free income while staying in the home seems like a no-brainer. The trouble is, since reverse mortgages started gaining popularity in the late 1990s, many senior citizens have been victimized by shoddy sales practices. A cited quote says "It's still The Wild west out there". But "as the 70 million members of the baby boom generation hit the qualifying age for a reverse mortgage (62), there is good reason to believe the forces of supply and demand will lead to significant improvements in the way these loans are sold, structured and maintained".
- Convertible Bonds Investment-grade convertible bonds can introduce some capital appreciation to a portfolio heavy on income-producing intermediate-term bonds.
- Master Limited Partnerships- article discusses how teh packaging of master limited partnerships into mutual funds, exchange-traded notes and exchange-traded funds is introducing a viable way to hold these higher-yielding investments in qualified retirement accounts with a less complicated tax structure.
Although the article does not specifically discuss structured settlement annuities, plaintiffs often face the same issues as retirees as their disabilities, or the loss of a primary bread winner may, in effect, make them "retirees" Furthermore, a structured settlement is a "souped up" form of immediate annuity that can also be a deferred annuity and can have more than one payment stream to address multiple needs as to timing and amount.
Investment News' immediate annuity strategy is the "longevity insurance approach", to write life only annuities that cease payment upon death to maximize yield. They refer to this as " the no-load version, skip the death benefit, just lock in the income"
This is all well and good if you have life insurance to offset loss of principal if you care about the possibility that you could die before the cost of the annuity has been paid out. For healthy and insurable retirees it may be is a superior strategy because this risk can be mitigated with life insurance. It IS possible to find 20 year level premium term insurance through issues ages as old as 70. For more information call me at 888-325-8640 or email me at firstname.lastname@example.org
I do have a technical criticism of the article where it gives the following example of an immediate annuity:
"A current-market-rate example for a 70-year-old married couple is a 6.7% annual yield for life, which includes all fees.
Depending on the size of the initial premium, the annual income from a 6.7% yield might seem low, representing a non-inflation-adjusted annual income stream of $6,700 on a $100,000 one-time premium".
Investment News uses the yield on the principal investment without disclosing that a portion what it states as the "yield", includes a return of principal component. If you invest $100,000 in a 10 year Treasury bond that yields 2.7% annually, and hold it to maturity, you get the 2.7% and you still have the $100,000 at maturity, whether you live or not.