The following is in response to Wade Pfau’s article, Unlocking the Two Mysteries behind SPIAs, which appeared last week:
Dear Editor,
As a retirement income planning expert who has spent the last 15 years devoted to the math and science of testing and developing income annuities, I have been involved in a recent discussion on the RIIA LinkedIn group regarding the paper that Wade referred to in this article, The True Impact of Immediate Annuities on Retirement Sustainability: A Total Wealth Perspective. Unfortunately, Wade’s title only defined the topic as, “single-premium immediate annuities,” (plural) when in reality Wade’s material studies only a single “life-only” SPIA option. This is the least used of all SPIA contracts when building retirement plans and Wade’s article compares a rather sophisticated ladder of bonds and equities to a constrained split-asset strategy to a single life-only SPIA.
To be fair, in describing Wade’s mission for his article, his intent was to compare the findings of a prior study that also utilized the same constrained life-only SPIA option.
In general, my beef about these studies is that they theoretically test what I perceive to be non-practical approaches, because clients would not normally use a SPIA product at age 65 in the way depicted. In other words, the SPIAs being used provided no installment or cash refund options, no period-certain options, no COLA-adjusted options and no direct comparison of actual SPIA quotes.
Titling an article with simply SPIAs will tilt the reader to assume that it portrays the truth about SPIAs in general. This is not the case as the math and science in the theoretical illustrations in Wade’s article provide less than favorable comparisons. Indeed, SPIAs and deferred-income annuities (DIAs) can be used in a much more powerful way. Studies such as Wade’s article must consider the tax effect, fee-drag and some level of inflation, and consider the creatively engineered solutions available from the entire inventory of income annuities being manufactured today. Until they do, these results will be far less optimal versus what can be accomplished when all income annuity products and features.
This is like writing an article about “The True Value of Stocks” or “The True Value of Bonds” and then using only the average results of small-cap stocks or municipal bonds (and ignoring the risk tolerance or tax rate of the client). Anyone would agree that stocks and bonds are most appropriately framed when they are fully utilized and ordered in a logical diversified approach. This principle is also true for income annuities. You must first fully grasp and command the knowledge of all income annuities, including SPIAs and DIAs, and their available rider features, before defining opportunities. In fact, my firm almost never uses a life-only version of an income annuity at age 65 unless there is a corresponding life insurance policy being used. This approach considers the practical hurdles that we face when dealing with the emotional aspects of our clients.
I do, however, agree strongly with Wade’s discussion of the implied portfolio value for the unpaid remainder of the income annuity payments. The math described in his article, however, of limited use because it uses a life-only SPIA. Our firm uses a fair amount of period-certain SPIAs and DIAs in laddered formation with inflation-adjusted life and joint-life installment of cash-refund annuities. In the case of period-certain annuities, there would be no discounting for implied life expectancy factors when reporting the portfolio remainder valuations.
I was introduced to Wade during a recent visit to the American College because of my work as a contributor to the online content of the RICP designation. Wade is a great expert and I have significant respect for him and hope at some point to be able to contribute to articles that help utilize our mutual intellectual expertise.
Sincerely,
Curtis Cloke,
CEO & Founder
Thrive Income Distribution System, LLC.
Burlington, IA
Thrive Income provides a platform for advisors to purchase annuities.
