I recently worked with an advisor on an income plan. The client was presented with a thick ream of a proposal from Fidelity that was shockingly light on concrete details. Below is what we prepared to present to the client, showing a better solution for the clients using DCF Exchange higher yield guaranteed and period certain annuities:
Thank you for sharing the proposal from Fidelity for your clients: Mr. and Mrs. Galvez.
Let me first say something nice- There is one fundamental premise to this that we all can agree on, which appeared on page 16 of the proposal. ‘Fidelity believes you should cover your essential expenses with lifetime income sources, such as social security, pensions or annuities.’
In any retirement plan designed to give peace of mind and security, this is the first step.
But after wading through the other 103 pages of boilerplate, what surfaces is that they propose putting 50% of the assets, or $2,150,000, in what they loosely label as a “fixed annuity.” In fine print they detail this as a joint life immediate lifetime annuity with return of premium option.
The purpose of this annuity is to create +/-$140,000 annual guaranteed income. This new income is added to the $120,000 the clients already have from the various annuities, pensions, and Social security, and is meant to cover their essential expenses
Fidelity then modeled the performance of the remaining assets in average, above average, and below average performance, and show the net remaining portfolio value.
While Fidelity never bothers to define what above and below average really means, it’s important to note that in no scenario are Mr. and Mrs. Galvez at risk of running out of money.
As Mr. and Mrs. Galvez already have significant assets and income from various sources, what immediately occurs to me is that this large lifetime income annuity is a solution to a problem the clients do not have.
They have expressed a desire for guaranteed income, but do they need guaranteed LIFETIME income?
The lifetime aspect of the income annuity offers peace of mind, but with over $5M in assets and with over $120,000 in lifetime income already, I would advocate for a solution that achieves their income goal for a reasonable period of time and at the lowest cost. This leaves significant assets left over in the markets, which will grow and will leave assets in their control to more efficiently provide them with longevity protection.
Guaranteeing income is the smart and safe thing to do. But if they look rationally at their scenario, they would see that the SPIA just offers more protection against outliving their income, and that protections is simply not necessary given their overall financial health.
Here’s the meat of the Fidelity proposal:
Return: $143,772 / year for joint life, with return of premium option.
While on the surface this may appear to be a 6.6% payout rate, in reality, the actual investment rate of return depends on how long that income is taken. If both Mr. and Mrs. Galvez pass away in the next 15 years, the proposed annuity offers an astounding 0% rate of return. In fact, Mr. Galvez needs to live to age 100 and Mrs. Galvez to age 96 to achieve a 4.5% rate of return. Given both of their health profiles that you shared with me, you indicated that 5 years was a long horizon for him, and 10-15 for her.
Again, why are they even considering longevity income protection given these facts?
- His/Her Age
- # of Yrs Taken
- Rate of Return
- Total Payout
Now, this particular annuity DOES accomplish one aspect of their goal- it provides guaranteed income to cover essential expenses. And in so doing, it gives the remaining portfolio a much higher degree of flexibility to be invested from growth, and relieves the stress of systematic withdrawals in a down market from the portfolio.
Guaranteed income is good, but do they need guaranteed LIFETIME income?
In addition to questioning the need for LIFETIME income, I must point out the the lackluster performance of this proposal.
The Fidelity proposed annuity stops paying when they pass away, and only offers a fallback ‘return of premium’ guarantee of not less than a 0% rate of return. So while it offers a lifetime income stream (when lifetime income may not be prudent or needed) and it does so at a significant cost of overall yield to their heirs.
Bottom line: An income stream from an annuity is the right way to tackle this problem …. But the specific type of annuity offered by Fidelity is not the right tool for this job.
How about a better solution?
What we specialize in are higher yield guaranteed and period certain annuities that offer a better way to generate income than what Mr. and Mrs. Galvez were presented with.
We buy annuities from individual recipients of personal injury settlements who have received compensation in the form of monthly or annual payment. But when times change, people sell their payments to my company in exchange for a lump sum. I in turn offer these payments through advisors like you, to your clients like Mr. and Mrs. Galvez who are seeking stable, guaranteed and dependable income. These payments are known as ‘secondary market annuities’ or SMAs.
Using secondary market annuities With Mr. and Mrs. Galvez
Because individuals sell at a discount in a secondary marketplace transaction, the yield available to Mr. and Mrs. Galvez is higher than what they can get from newly issued annuities like what Fidelity proposed. A 20 year income stream from my company would yield approximately 4.2% from day one, and is guaranteed to pay for a full 20 years, unlike Fidelity’s solution.
Because my payments have a higher yield, they simply cost less than more expensive annuities. In this scenario, we could generate the same $142,500/ year for 20 years with just $2,000,000, saving over $150,000 from the Fidelity scenario. Alternatively, they could invest the same $2,150,000 as recommended, and achieve $158,000/ year.
They can choose to either save 7% on the cost of their guaranteed income, or increase their income by almost 11%
Here’s what a diversified portfolio of SMAs would look like for Mr. and Mrs. Galvez,
Return: 240 Monthly returns of $13,185 from 6/1/19 to 5/1/2038
Payout Rate: 7.36%
Total Guaranteed Payout: $3,164,632
I have assembled many portfolios of secondary market annuities for other clients. Each accomplished the client-specific goals and I’d be happy to share summary tables with you so you can see what several cases together can offer.
If this is of interest to Mr. and Mrs. Galvez, we can get started right away with several in-stock payments that suit their needs and are ready to go.
I’d be happy to answer any additional questions for you and the clients, don’t hesitate to call
Nathaniel M. Pulsifer