Recently, in a LinkedIn discussion group, an insurance agent started a discussion titled “New income product for retirees.” The post suggested that I “Ck (sic) out how retirees can add 30% to funds and get income for life.”
30%. Hmm. My money market is yielding 0.68%.
His post continues:
“I’ve just come across a new Retirement income product for your ‘safe’ money that has some AWESOME benefits for YOU! Abraham Lincoln (aka “Honest Abe”) selected this insurance company to insure him.”
As you know, “Honest Abe” pioneered (along with his partner, George Washington) the concept of the massive mid-winter automobile sale, demonstrating both his commitment to the inalienable rights of all men, as well as his marketing genius. If a company he trusts has AWESOME benefits for ME, I am all ears. I click the link to find out more.
I see some bullet points that mention bonuses, additional bonuses, and indexing options that “give you the upside risk of the market with no downside risk.” To top it all off, “you get all that with only a 10 year surrender schedule.”
It sounded fantastic, but I still had to ask a few questions. Unfortunately, I couldn’t understand the answers. Fortunately, my dog, Bella, did.*
She explained the simplest of the product’s options as follows:
“Suppose you were 70 years-old, had $100,000 to invest, and wanted to begin receiving guaranteed income for as long as you lived. For the purposes of determining your monthly income, the company would give you a 25% “bonus” and use a “base” of $125,000. From that you would receive 6% annually, about $625 per month.”
“Is that good?” I asked.
Bella went to http://www.immediateannuities.com and informed me if I simply purchased a single-life annuity, my monthly income would be about $700 per month; 12% better than AWESOME.
I gave her a treat and went downstairs to watch a Seinfeld re-run. It was the one about the Junior Mint.
While the marketing of this product falls somewhere between cheesy and reprehensible, it does not even approach the worst I have across on purely financial terms. A good rule of thumb is that the more “bonuses” and “options” the product provides, the faster you should run away.
That said, I am a big supporter of insurance products that provide guaranteed lifetime income making effective use of mortality credits.
I wrote an article on mortality credits earlier this year, but a simple example (borrowed from Moshe Milevsky) illustrates the principle.
Five 90 year-old women put $100 in a jar and agree that the survivors will spilt the money in one year. During the year, Mildred dies and the four survivors each get $125, a 25% return. That is the mortality credit.
30% “bonuses” and the like are a “fun with numbers” game to distract you from the fact you are leaving a large portion of your mortality credit on the table. To be clear, I am not advocating mortality-contingent products for every retiree; silver bullets don’t exist. I am also not saying that there is no place for guaranteed withdrawal products; they can certainly be useful in the right situations.
When you are considering any financial product, you should get the advice of trustworthy professional that will take time to get to understand your unique needs and does not “specialize” in a certain product. In a future post, I’ll discuss what to look for in an advisor. (Quick preview: the word “awesome” may not necessarily appear as a credential). And if any financial product comes with a free set of steak knives, Run!
*Apologies to Dave Barry