American Health And Life Insurance Company

Retirement Annuities: Do They Make Sense?

An August 7th article in The Sunday Oregonian caught my eye with this title: Is an annuity right for you? Well, probably not. The article laid out a story where the North American Company for Life and Health Insurance sold a 66 year-old man (named in the article) an annuity for $150,000 that would provide him an income of $1,000 per month until he dies. The annuity was to begin immediately. The article also stated that low interest rates will now only buy a $900 per month annuity with the same investment.

The mental wheels began to spin to figure out the last part of the title, "Well, probably not." Peeling off $1,000 per month from $150,000 placed under the mattress will last 12.5 years taking the 66 year-old up to age 78.5. Government actuarial tables show that a 66 year-old male is expected to live 16.5 more years, or until age 82.5. The insurance company needs to earn enough to span the 4-year gap. A little spreadsheet work shows covering this gap should not be all that difficult, Since we are dealing in probabilities, a Monte Carlo analysis is in order to answer the basic question of whether this annuity makes sense.

In the analysis below, the income oriented portfolio consists of ten ETFs. Treasury, TIPs, U.S Equities, REITs, junk, Intermediate and short-term bond ETFs populate this conservative portfolio. This is not a "normal" portfolio. Rather it is designed to throw off income to bridge the four year gap. Will it work?

Assuming an inflation rate of 3.5% and a growth rate of 5% (low assumption) for the S&P 500, this portfolio has a 10% chance of running out of money by age 75. That number was a surprise. Why should a very conservative portfolio, generating income, not provide better protection? One only needs to think of setting up an annuity in March of 2000 or November of 2007. Those are the risks undertaken by the insurance company. In addition, they worry about the inflation rate, set at 3.5% in this analysis, plus all their overhead costs. Overhead expenses are not considered in this example.

Check the probability results shown below.

While my first reactions to the $1,000 per month annuity was negative, upon further examination, it is a reasonable contract. The $900 per month contract is less so.

The "do-it-yourself" investor does not want to risk that 50% chance of running out of money by age 78. Certainly not if this is the only source of income. What changes need to be made to alter the above probability numbers if the investor wishes to go it alone?

Insurance News - American General Life Companies Announces Annuity ...

“We developed AG Lifetime Income Builder to meet the growing need for insured retirement income solutions in the post-financial crisis world,” said Jay Drucker, vice president and annuity line business leader.“ In fact, according to the recently released SunAmerica Retirement Re-Set Study, 60% of Americans age 55 and older seek guaranteed retirement income that is protected from market loss. , a new living benefit rider available on selected fixed index annuity contracts and available to those age 55 and older. Structured to provide future guaranteed lifetime income, the rider features an income base that is guaranteed to grow at no less than six percent compounded annually for up 20 years, and a guaranteed lifetime income stream guaranteed to grow at no less than two percent per year if the income base is allowed to accumulate for at least 10 years and no excess withdrawals are taken. Both of these features can help offset the erosive impact of inflation over the long term.

“We developed AG Lifetime Income Builder to meet the growing need for insured retirement income solutions in the post-financial crisis world,” said Jay Drucker , senior vice president and chief marketing officer, added, “The SunAmerica study also revealed that one third of Americans age 55 and older say their financial assets have not yet recovered to pre-recession levels, and almost all Americans in this age group say it’s important to protect themselves against financial uncertainties. This rider can help position them for potential asset growth while also guaranteeing a predetermined baseline of future income. That kind of certainty regardless of economic conditions can make the planning process easier.”

Available in twenty nine states as of Horizon Index 9 and 12, AG Global Bonus, and AG VisionAdvantage 7 and 9. At contract issue, the Income Base is equal to the Annuity Value, including any applicable premium bonus. The Income Base used to generate future income is guaranteed to grow at six percent compounded annually. Called the Roll-Up Rate, it increases the Income Base until the earliest of these three events: the 20 birthday.

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