LIFE & Health Advisor January, 2013


As if there wasn’t enough for retirement income planners to be concerned about. After having been forced to deal with anxious clients, near-zero interest rates, market volatility, a limping economy and inevitable changes in the tax code, now financial advisors have to contend with potentially destabilizing capacity constraints that have already forced life insurers to withdraw some of the most attractive guaranteed lifetime income products. 

Just when an increasing number of advisors had begun to accept the importance of incorporating guaranteed income inside a larger retirement income investing strategy, advisors now have to face the possibility that the universe of guaranteed income products may continue to shrink in numbers while at the same time the remaining products shift to less generous benefits. As capacity shrinks, competition becomes fiercer. And no market is already more competitively contested than the retirement income market. 

The good news is that financial advisors tend to be creative individuals who are adept at making lemonade out of lemons. And, in fact, for investors who crave more predictability and certainty in their retirement income strategies, it’s possible for advisors to design attractive solutions that can deliver predictability, and more. In the process, advisors can effectively package themselves…as retirement income experts. In my view, that’s an advisor’s wisest strategy for ensuring business success in the years ahead. 


In 2013, feature-based product competition in the retirement income market will, I believe, give way to packaging-based competition. Everything that can be rung out of products has been done. Therefore, the broker-dealers, product manufacturers and advisors who are most effective at “packaging” will win out at the expense of companies and individuals who can’t move past yesterday’s product-focused business development and investing strategies. Going forward, “strategies, “solutions” and “concepts” are the driving forces. There are two reasons for this. First, it’s impossible to base a sales strategy on new and improved features when there are none. And second, by combining the products that are available in a creative manner, it’s possible to create performance synergies that generate better overall results for clients. 

One way to do retool packaging is to look at the landscape of available products e.g. mutual funds, managed accounts, period-certain immediate annuities and fixed deferred annuities, and then combine those products into a retirement income strategy that can effectively meet the needs of middle market investors. “Middle market” in this context relates to investors with between $200,000 and $1million of investible assets, individuals who typically benefit from an allocation to a “floor” of guaranteed income that supplements Social Security or other guaranteed income sources. 


Let me share an example of how by combining products that are conveniently available, an advisor can craft a retirement income strategy that provides guarantees, an investment portfolio with growth potential, a high degree of flexibility, and even positive implications for optimizing the investor’s Social Security claiming strategy. 

At Wealth2k we’ve created an iteration of The Income for Life Model® called Income Choice Strategysm (ICS). ICS was developed for middle market investors who typically want both the growth potential of investments and the security of guaranteed income. To create fourteen years of guaranteed monthly income over two, seven-year phases, ICS uses two annuity contracts: a 7-year single premium immediate annuity (SPIA) and a 7-year fixed deferred annuity (FDA). 

The 7-year SPIA provides a guaranteed monthly income in years 1-7. Beginning in year 8, the fixed deferred annuity will be annuitized to provide guaranteed income in years 8-14. At today’s interest crediting rates, the 7-year FDA will provide enough interest accumulation to create a second phase of income that steps-up to a level that is the economic equivalent of a 3% annual inflation adjustment paid-out over years 8-14. 

Why use a 7-year SPIA and a 7-year FDA? The 7-year SPIA is chosen, primarily, to avoid a lifetime lock-up of client assets at a time when the IRR of lifetime SPIAs is historically low. Another reason is that if the client is able to defer the purchase of the SPIA for 14 years, enhanced mortality credits will increase the economic efficiency of purchasing future lifetime income, even if interest rates remain very low. A 78 year-old receives a much higher mortality credit than a 64 year-old. 

In terms of the fixed deferred annuity, a 7-year contract credits a bit more interest than, say, a 5-year annuity. Combining two 7-years annuities, therefore, seems to provide the best approach for (1) maximizing the current interest crediting rate, (2) moderating the total loss of liquidity, and (3) avoiding the need to immediately annuitize assets for life. 

Now that we’ve addressed the client’s need for income, how do we handle the investment part of the ICS strategy? Well, that part is addressed by a professionally managed investment portfolio. This portfolio could be comprised of mutual funds, or a managed account. The investment portfolio provides the potential for investment gains. It also adds an ongoing source of liquidity. 

While the combination of annuities provides guaranteed income over fourteen years, we can’t know how the investment portfolio will perform over that period. Hypothetically, however, if the investment portfolio were to earn an average return of 7%, it would accumulate to a dollar value equal to the total amount of money allocated to purchase the two annuities, plus the initial allocation of dollars to the investment portfolio. After fourteen years, investors may choose from several options. They can repeat process, liquidate the investment portfolio, or use some or all of the investment assets to purchase a lifetime SPIA. 

The implications for Social security planning can be important. The guaranteed income provided by the annuities may help bridge the investor’s come needs over the short or medium term. This may make it easier for the investor to defer claiming Social Security retirement benefits until a later time, thereby creating more guaranteed monthly income, for life. 


Here’s a hypothetical example of ICS that Wealth2k uses to explain the concept. Consider Sue Thomas. Sue is 64 years of age, recently retired and in good health. She has $750,000 in investible assets. Sue’s main concern is to ensure that she has enough predictable monthly income. 

Sue is comfortable with exposing some of her assets to market risk. She also understands that she can maximize her lifetime Social Security retirement benefits by deferring claiming Social Security until age 70. She’d like to do just that. 

To ensure that Sue has plenty of liquid assets available, $500,000 will be allocated to fund the plan.

  • $158,362 is used to purchase a 7-year SPIA.
  • $147,730 is used to purchase a 7-year fixed deferred annuity, and,
  • $193,909 is allocated to an investment portfolio that will target a 7% rate-of-return over fourteen years.

Over the first seven years of the plan the SPIA provides $1,952 in guaranteed monthly income. Beginning in year 8, the fixed deferred annuity is annuitized, making it possible to provide $2,401 in guaranteed monthly income. This step-up in monthly income represents the economic equivalent of a 3% annual inflation adjustment paid to Sue over years 8-14. 

While Sue’s annuities payout monthly income over fourteen years, her investment portfolio would have the potential to grow. Comprised of a diversified selection of investments, we can’t know how the investment portfolio will perform. However, we can look at some hypothetical scenarios that illustrate accumulation values assuming net rates of return ranging from -1.5% to 10%. 

If a 7% return were to be realized, Sue’s investment portfolio would grow back to the original total strategy investment of $500,000. 


Suppose Sue was an investor who was not comfortable to exposing retirement assets to market risk? Another ICS design option would be to allocate funds to a deferred income annuity (DIA) rather than the investment portfolio. A DIA with a 14-year deferral period would fully-guarantee the income strategy, for life, including a second step-up for inflation. The DIA is valuable planning tool that provides true “income insurance” that mitigates the investor’s longevity risk. Arguably, however, as presently presented, the DIA has limited potential for uptake with the majority of advisors. But incorporating DIA into a larger income strategy- “packaging”- is a key to promoting wider adoption of a very important product. 


Financial advisors who make the commitment to becoming experts in retirement income planning are likely to experience greater rewards in the years ahead. But reliance upon old strategies, whether they be old investing strategies, or old business development strategies, is a sure way to limit one’s success potential. We are entering the retirement income “age of packaging,” and the most savvy and successful among us will be certain that every form of client interaction is packaged to the optimum level. 

Reproduced with permission from LIFE & Health Advisor, P.O. Box 613, Walpole, MA 02081 The Journal for the Financial Services Industry