Retirement Planning

Do You Wish You Had A Pension Too? Guaranteed Lifetime Income Products

by | Apr 9, 2020

There is an annual study that comes out every year by the Employer Benefit Research Institute and it always has many interesting statistics. The one that jumped out at me this year was the fact that 4 out of 5 employees were interested in products that would provide a guaranteed income for life (GIFL), most often referred to as a pension.

Why is that?

What is a GIFL product?  It’s a personal portable pension.  A vehicle that provides an ongoing lifetime withdrawal benefit, a lifetime of income that can often be passed along to one’s surviving spouse as well.

The financial services/insurance industry “pundits” view these products in two very distinct ways: opinions about GIFL products.

               1) They are terrible products that should never be used.

               2) They are invaluable products that many clients should use.

Why would advisors NOT offer GIFL products to clients? They say they are too expensive. They say that the products are simply giving the client back his or her own money. They say that the client can get the same or a better outcome by using a proper mix of stocks, bonds, and mutual funds.

Why would an advisor OFFER GIFL products to clients? To provide certainty that a client will never run out of money as long as he/she lives.

Well…who’s right?  

As is the case in most arguments, both sides are right to varying degrees. GIFL products do give the client back his/her own money plus interest. There is sometimes an expense to an annuity with a GIFL rider.  However, it is impossible to provide the same or better outcome to clients with a mix of stocks, bonds and mutual funds because withdrawals from these investments are not guaranteed.

GIFL products will distribute payments to a client no matter how long they live. If someone lives to 90, or 95, or 100, these products will keep paying the agreed upon amount even if the account is drained completely of all money deposited and its earnings.

Of course, no one knows when you are going to die.  Living a long life is a risk to your investments.  Meaning, it is a risk that you could outlive your money.  However, when you shift that risk to an insurance company, along with a large number of others, that risk can be calculated and insured so that the owners of the GIFL’s and the insurance companies that manage their savings can be very certain that they will never run out of money.

Example of a GIFL

Let’s look at a 55-year old who has $1,000,000 in an IRA which is his/her main nest egg that MUST last throughout the rest of his/her life.

If the client put $500,000 of that money into one a GIFL annuity, the client is guaranteed to receive a $49,500 GIFL payment every year for the rest of his/her life starting at age 65.

The next questions you might ask are:

  • Is that a good deal?
  • Did we get our money’s worth out of the annuity?
  • Could we have done better investing it in a proper mix of stocks, bonds, and mutual funds?

Well, if you had $500,000 grow at 5.5% for the 10 years, then 3% the distribution phase starting at age 65, you’d run out of money at age 89.  Running out of money not good, especially at 89 years old!

However, things could be worse.  What if the client’s portfolio lost 35% of its value in the year of retirement, as a 60/40 stock/bond portfolio lost in 2007? Then the portfolio would run out of money at age 77!

Now let’s paint a better picture.  Let’s assume the stock/bond portfolio grew at 8% for 10 years but it lost 35% the year of retirement?  Then, the client would run out of money at age 81.

As an independent fiduciary financial advisor, I would never advise my client that running out of money at age 77 or age 81 is ok.  Would you?  That said, there are plenty of financial advisors who would.  Not directly of course.  Instead they would say something like, if your investments can earn 8% during the accumulation phase and, to reduce your risk we will reduce your returns 3% during the withdrawal phase, then, you will have a 90% chance of not running out of your money during your retirement.

The question you would then want to ask is, “Does that mean I have a 10% chance of becoming 100% broke”?

No one know how long they will live.  No one knows for certain when the next stock market crash is coming?  No one knows what the returns will be on a mix of stock and bonds.  So, why take the chance?

The risk is real.  Something can and possibly will go wrong at any time.  You don’t have to risk your money and you don’t have to worry about running of money in retirement if you shift that risk to an insurance company.

Conclusion

While the employees who took the survey are not experts in financial planning, they have their own life experiences of investing in the market and they have their own fears about running out of money in retirement.  As such, it makes total sense that 4 out of 5 are interested in GIFL products. These products are not for everyone, but they can play an integral role in the financial plan for anyone.

If you would like information on GIFL products, feel free to email me at [email protected].

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