Tags: MarketWatch | Longevity | Annuities | Consumers

MarketWatch: Longevity Annuities Have Come of Age for US Consumers

By John Morgan   |   Tuesday, 05 Aug 2014 08:35 PM

On July 1, the often-misunderstood asset class of annuities changed at last, and consumers should take a fresh look at their long-term income potential, industry expert Stan Haithcock writes on MarketWatch.

Haithcock said that’s the date the Treasury Department and the IRS approved the use of Qualified Longevity Annuity contracts in 401(k)'s and IRAs.

QLACs were introduced a decade ago as a simple no-fee way to collect lifetime income starting at a future date but were mostly ignored by the financial services industry and by consumers.

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“The more I thought about this new QLAC ruling, the more I am convinced that this is truly the defining moment for the controversial and negatively perceived world of annuities,” Haithcock said.

Industry practices are one reason the instruments have been overlooked, he said. “Even though the longevity-annuity category has grown in recent years, the low commission paid to the agent and the transparent design of the product is reasons most agents currently ignore this pro-customer strategy. Fear and greed sell annuities, and most agents like to sell dream-return (i.e., greed) scenarios attached to variable and indexed annuities.”

Under industry rules, QLAC proposals can only present contractual guarantees. According to Haithcock, that means 401(k) and IRA shoppers can now get a great view of the value of QLACs for their retirement accounts.

“Most variable and indexed annuities are sold on hypothetical, theoretical, or projected growth scenarios that never seem to pan out. In other words, people are sold the dream. With QLACs and the longevity annuity strategy, only the contractual reality exists. There is no way for an agent to juice the numbers on a longevity annuity proposal.”

Haithcock said current QLAC rules limit an investor’s participation to the lesser of $125,000 or 25 percent of a qualified account, but he predicted that number would be raised over time based on popular demand from retirees.

“Steve Jobs and his design genius Jony Ive were obsessed with simplification at every level of product design. Jobs also said that ‘people don't know what they want until you show it to them’, and my prediction is that the QLAC ruling will be the annuity industry's turning point back to simplicity once people see how simple and efficient a longevity annuity really is.”

In a recent column for Forbes, Steve Parrish, an attorney and financial planner at the Principal Financial Group, noted “people are far more comfortable living within a known income stream than they are spending down assets for an unknown period of time.”

Parrish said he observes a recommendation from Nobel laureate economist Robert Merton that prospective or current retirees take a portion of their retirement assets and purchase a fixed annuity income stream.

“The annuity income can begin immediately or it can be deferred until a later age. It can pay an income for life, for a period of years or for the greater of life and a guaranteed period of years,” Parrish wrote.

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