Retirement Income Authority and Certified Financial Planner, Philip G Lubinski, Takes On Fixed Annuity Income Riders: “Quit Implying It’s Simple!”

On the topic of retirement income planning Phil Lubinski is one the most experienced and knowledgeable financial advisors practicing. His virtually exclusive concentration on income distribution over more than two decades places him among a tiny minority of advisors who have mastered the investment and income tax strategies required to properly place retirement assets into a distribution mode.

Lubinski, who is both a friend of mine and business associate, doesn’t believe in easy answers to income planning needs. Too often, he says, advisors take the easy way out by substituting products for good planning. In response to yesterday’s essay Lubinski sent me his views on income riders that are increasingly being applied to fixed indexed annuity contracts. I thought I’d share his commentary as he makes some great points.

Insurance companies would be well-advised to move cautiously and carefully in the positioning of these fixed annuity income riders to both agents and consumers, in my judgment. Already, some broker-dealers have become concerned about financial liability potential arising out of their registered representatives’ positioning of variable annuities with guaranteed income riders as “solutions” to retirement income needs. Among the concerns expressed are worries that these riders in many cases may not provide step-ups in retirement income over time. This worry is arguably more urgent when the same type of riders are placed on fixed indexed annuity contracts where the long-term growth potential is less than with variable annuities.

The tendency of some insurance companies to seek the easy way out with their agents by appealing to the agents’ desire for an “easy” solution to a complex income planning challenge may provide insurers with short term gratification. But that gratification may come to insurers at the expense of long-term financial pain should consumers determine that these riders are really not the “solution” they expected.

David Macchia

I appreciate the attempts by annuity providers to create single product solutions, but I feel they are trying to cater more to the needs of the “fixed only” licensed reps, than to the true retirement income needs of retirees.

Research has shown that systematically withdrawing from a growth asset class is “risky business” Yes, a fixed indexed annuity protects the client from negative returns, but it does not protect them from losses due to “over withdrawing” during periods of “low” returns over normal market cycles.

Additionally, when markets are strong, every indexed annuity I’ve seen deprives the investor of S&P 500 dividends (2-3% of the total return) and credits interest based on complicated mathematics that I haven’t found an advisor or even a wholesaler can adequately explain it to me. All I know is that when discussing the rate-of-return goals of an indexed annuity with actuaries, I’m told that, at best, an EIA will deliver 50-60% of the S&P 500.

Moreover, when I’ve looked at research that has tested annuities with income riders, there is a significant probability that the account balance can go to zero leaving the beneficiaries nothing. Also, who in their right mind would want to tie the success of their retirement income to one company, one asset class and one product?

Imagine if doctors wrote prescriptions in this manner (we certainly wouldn’t need to worry about longevity any more). Indexed annuity products may have a place in an overall, multiple product/multiple strategy retirement income model, but they certainly are not a solution in and of themselves- no matter what income riders they may offer.

Retirees should be looking for advisors with legitimate credentials (CFP or ChFC), and multiple licenses (life and health, series 6, 7 & 65) who can demonstrate a comprehensive approach to retirement income planning. We’re dealing with an individual’s life savings here, folks. Quit implying it’s “simple”. It’s NOT

Philip G. Lubinski, CFP
Denver, CO

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©Copyright 2007 David A. Macchia. All rights reserved.