An e-Guide by Annuity Research & Consulting LLC
(20-30 Minute Read)
Are you retiring this year or next?
Or just want to plan ahead?
This e-Guide has information About ...
401(k) lifetime Income Illustrations,
How immediate income annuities might fit,
and Managing the risk of running out of money.
Need help understanding your 401(k) income illustrations?
Or want to learn a pension plan idea
called asset/liability matching (or "LDI")?
This unbiased guide will simplify all of this, and more!
This e-Guide/website is for informational purposes only.
It is not designed or intended to provide investment, insurance, legal or
other professional advice since that advice always requires
consideration of individual circumstances. If such services are needed,
they should always be sought directly from a licensed professional.
First Things First:
There is no such thing as the perfect retirement income strategy.
There are only tradeoffs.
Here are some of the considerations for two
of the most common approaches
1) Systematic Withdrawal:
Money invested in stock and bond strategies is slowly withdrawn over time from
a combination of interest, appreciation from good luck in the markets,
and/or a return of principal during bad times of bad luck in the markets.
This offers the hope of ongoing flexibility and inheritances,
for which you risk that your income may be reduced or even lapse.
Unknowable economic and market risks can occur
suddenly and without warning, which may cause the
depletion of your account over time.
2) Fixed Annuities:
Insurance companies offer lifetime income guarantees for one or both spouses.
This offers protection against running out of money no matter how long each are alive,
for which you risk flexibility and inheritances.
Liquidity and bequests are limited, will decline over time, and/or in some cases aren't offered.
There may be roles for both strategies in a
retirement income plan.
We provide an example in our Case Study,
called "Secure A Shelter™️"
Remember, this e-book focuses on people who need information
this year or next from accumulating savings
to income immediately.
The role of the Single Premium Immediate Annuity, or "SPIA", is one
of the least understood in the financial services industry.
This book will focus on the potential role immediate income annuities/SPIAs can play.
Most other types of annuities are designed to help save money first
and provide income later.
Table of Contents
Employees may see lifetime income illustrations on their 401(k) statements they do not realize are rough annuity calculations that use "mortality risk pooling". We explain them here.
The U.K. government created "Pension Wise" to provide unbiased guidance so consumers could understand their options better, before seeking advice from the financial industry.
Nobel Laureate Economist Bill Sharpe
on the Fixed Annuity's Role
This trusted thought leader's 2017 ideas include:
*Prudent tools for a retirement income plan.
*Individualized scenarios are optimal.
*Risk tolerance questionnaires are unreliable.
We use short insights from Dr. Sharpe's book as building blocks all retirees should consider.
Don't worry - we leave off the math and translate industry jargon so everyone can grasp it.
This is a list of key questions for consumers to ask about annuities. ARC specializes in providing unbiased information for 401(k) plans.
We're not paid to distribute products.
Shopping for SPIAs in the marketplace is easier today. Several companies are available to choose from. We provide links to some of them (but do not endorse or benefit) .
A retired couple who suffered through the terrifying 2008-2010 Global Financial Collapse learned the importance of matching their different expenses with different income sources.
Their solution included an annuity.
"Showing no prejudice for or against something
...his assessment of the benefits and drawbacks was unbiased"
Source: New Oxford American Dictionary
The primary business of Annuity Research & Consulting LLC (ARC) is advising 401(k) plan trustees and their consultants. To eliminate conflicts of interest, we charge hourly and project-based compensation rates for our advice.
We receive no fees or commissions from any annuity products or asset managers, and do not provide customized advice directly to individuals. This e-Guide is designed as general education, not specific recommendations tailored to personal situations.
The $30.00 cost is meant to be affordable to all. If this content were free, you'd have to worry about our conflicts of interest from other sources of revenue such as selling products.
The Story Behind Your 401(k)
Lifetime Income Illustration
The lifetime income illustration on most 401(k) plan statements is meant to
represent the amount of income your balance could generate from Single Premium Immediate Annuities (SPIAs) currently available in the market.
Your employer may have adopted it because the Department of
Labor supports it as a good idea (the SECURE Act).
However, there is tension about SPIAs within almost
every corner of America's financial services industry, making it
difficult to find objective information about them.
Sometimes this is simply because of business reasons.
This means the retirement income advice consumers can
get outside their 401(k) plans may vary depending on the
business model of the person you happen to speak with.
Some "Registered Investment Advisors" exclude annuities.
This may be because they don't know how SPIAs might
fit into an asset allocation model, or because they don't
fit into a compensation model which prefers custody of assets.
Other retirement advisors may promote only the versions of
annuities which pay higher commissions than SPIAs do.
These are obstacles to objectivity in other countries as well.
In England, the government decided to provide consumers
affordable, unbiased guidance, starting with a website
in 2015 called "Pension Wise".
It was meant to arm consumers with the information they would
need in order to decide what kind or financial expertise they
may want to seek out in the private sector.
This project is our attempt to bring the idea of affordable,
unbiased information to 401(k) participants in America.
In 2015, those in charge of England's 401(k)-type retirement system focused on a problem to solve: they knew it wasn't easy to find unbiased guidance about different retirement income solutions.
Their "Pension Wise" website was launched to help consumers know what
questions to ask financial professionals when they meet with them.
Our e-Guide Follows in the Footsteps of England's
Unbiased "PensionWise" Educational Guidance
Questions & Answers About Default Lifetime Income Illustrations on 401(k) Statements
Q: What does the income illustration on my 401(k) statement tell me?
Q: What does the income illustration represent?
A: Most 401(k) statements use rough estimates of immediate guaranteed lifetime income annuity rates currently available in the retail market (also known as "SPIAs"). It turns your current balance into a "what if?" hypothetical example of the income you could generate today, based on current interest rates, if you stopped saving now and retired with your current balance at age 67 (chosen because this is the full retirement age for Social Security benefits).
While this idea may seem illogical to those intending to keep contributing to their plan and investing it for growth, the portrayal of the cost of purchasing income guaranteed for life is to help inspire you to keep saving!
For anyone who wants to estimate based on continued savings and investment, the Department of Labor offers a hypothetical online calculator to help you model how much your 401(k) balance might grow to over time (and then generate income through the purchase of an annuity):
Lifetime Income Calculator | U.S. Department of Labor (dol.gov)
The illustration may look something like the example below
for a hypothetical balance of $125,000.00:
There are two main components:
1) Interest, and 2) Mortality Credits which are guaranteed for life by
an insurance company.
Q: Why was the annuity chosen as the default calculation for 401(k) statements?
A: Annuities can guaranty income for as long as you live. This cash flow may be both higher and less risky than other alternatives, because it comes from a combination of interest and return of principal. Those who live the longest get to spend the savings of those who die sooner. This is called "mortality risk pooling". Many Nobel Prize winning economists who are experts on risk suggest this idea, and the pension experts at the DOL agree.
Q: Who decided this idea is the best way to illustrate income?
A: The SECURE Act is named that for a reason. Experienced pension plan professional volunteers at the DOL's Employee Benefits Security Administration decided after several years of consultation with all corners of the financial industry that this was the single best approach to illustrating the cost of secure retirement income.
Q: I'm retiring soon. What's the best way to search for a single premium immediate annuity outside the 401(k) plan?
A: The answer can depend on who you ask. Some professional advisors don't use annuities or even understand them well enough to give you objective information. Others may try to sell you a different kind of insurance product that generates higher commissions.
*A more detailed explanation about the illustration can be found on the DOL's website (link below).
We also draw ideas and inspiration from the highly respected economist Bill Sharpe, an unbiased expert on the risk and return tradeoffs of stocks, bonds, annuities and mutual funds.
He was awarded a Nobel Prize in Economic Sciences in 1990.
Bill Sharpe's original ideas about risk and return became the basis for modern portfolio theory, led to index fund investing and became the bedrock for most of today's investment best practices.
In 2017, he self-published a free e-book about retirement income solutions for individuals, called "Retirement Income Analysis".
His book was written to help the financial services industry innovate new ways of managing the risk of running out of money.
It includes a chapter on Single Premium Fixed Annuities.
We will cover some of the insights for readers to consider on the next page.
These selected sections from Dr. Sharpe's book are specific insights which we use as building blocks for individuals to consider.
from Bill Sharpe's Book:
Retirement Income Analysis with Scenario Matrices (RISMAT)
(ARC adds comments to clarify concepts)
(How Long Will I Live?)
(How am I different?)
(What is my purchasing power?)
(How happy will I be?)
(Where might they fit?)
(What should I watch out for?)
From Secure A Shelter™️
"WHAT IF CONNIE AND ZIGGY HAD PRIORITIZED THEIR RETIREMENT EXPENSES INTO THREE BUCKETS BASED ON WHAT WAS MOST IMPORTANT TO THEM? THE APPROACH OF SEGMENTING AND FUNDING DIFFERENT EXPENSES WITH MORE ECONOMIC PRECISION WOULD HAVE EASED THEIR OVERALL STRESS AND DOES NOT REQUIRE ROCKET SCIENCE. IF IMPLEMENTED FROM THE START, IT MAY HAVE HELPED ZIGGY LIVE LONGER."
This true story is meant to be for educational purposes only. It is not meant to be personalized investment or insurance advice. Individuals who need such services should consult with licensed professionals before making decisions.
It may be prudent to diversify across multiple companies.
Immediate Annuity "Platforms" make this easy for consumers to do.
See our discussion about different SPIA platforms in the SPIA Platforms Chapter below.
Immediate Annuity Options
To Inquire About
1. Inflation-Adjustment Choices
(Guaranteed annual increases,
versus the same amount for life, becomes substantially different over time...
$1,000 a month compounded at 2% annually over 30 years grows to $1,811 a month).
2. Can Return of My Initial Investment Be Guaranteed in Case I Die Early?
(Over what time period)?
3. Are Liquidity/Flexibility Options Offered?
(Sometimes called commutation, this varies by company - we recommend researching because some products offer none at all)
4. If Not Liquid, is an Inheritance Possible?
(What if I/We die early)?
5. Single Life Income Quotes vs. Joint Life Income Quotes?
(With and without the options I want)?
6. How Conservative is the Insurer's Balance Sheet Management?
Is it a mutual (lower risk), or a for-profit stock company (higher risk)? Is offshore reinsurance used (higher risk))?
7. Minimum Investment Size?
How easy is it to diversify between issuers (what are the State Guaranty Fund limits)?
8. How Much is the Commission?
Are there any surrender charges or other fees? SPIAs historically have low commissions and do not have annual fees like other kinds of annuities do, but if liquidity is offered is there a surrender charge or market value adjustment? Also, some advisors may bill for their own fees separately.
VII. SPIA Platforms
Single Premium Immediate Annuities have been around a long time.
They're commonly used by defined benefit plans to manage risk.
Several platforms are available to help consumers comparison-shop.
SPIA Platform Companies
Here's a sample list of websites that provide quotes and sales of immediate annuities from multiple insurance companies.
We have no business relationship with any of them; this list is meant to be informational only.
This is not an offer or recommendation - consumers should do their own research and speak with these firms directly should they want more information.
ARC neither endorses nor receives
compensation from any of the above firms.