A Closer Look

Single Premium Immediate Annuities
Single Premium Immediate Annuities (SIPA) are increasingly in the spotlight. Noted speaker on retirement savings, Moshe A. Milevsky, is now a proponent of this tool for retirement savings. People with assets diminished by the recent decline in the equity market and are suffering interest rate declines on fixed investments are considering single premium immediate annuities as a resource to restore lost spendable income.

Why? If you are at or about age 65, a SPIA can provide a guaranteed stream of income equal to 8% or more for your life. This strategy allows proceeds from the annuity to provide the needed income.

A quick example illustrates the point. A 65 year old individual has $250,000 in a certificate of deposit earning 3.5%. The annual taxable income is $8,750. If our individual is in a 25% combined state and federal tax bracket, the net spendable income is $6,562 per year.

The individual elects to place $100,000 of the original $250,000 in a SPIA. The fixed income from the annuity is $8,000 per year for the first 12 years; only 25% of the annual income is subject to tax. Therefore, the net income is $7,500, which is a 14% improvement over the income from the CD account.

The individual still has $150,000 in the CD account, which can be added to the annual income, or deployed in another investment which might produce higher returns in the future.

Markets Offer Younger Investors a Great Opportunity
It is our job as advisors to help younger investors fight skepticism and focus on the fundamentals of consistent savings and balanced investing. Two of the most important factors in building wealth are time and acquisition costs. The longer the time frame and the lower the acquisition costs, the higher the odds are that one's wealth will grow.

For example, if an individual invested $10,000 (inflation-adjusted at 4.3%) a year into a balanced portfolio starting in 1962 over the next 20 years, the individual would have invested a total of about $307,000. By 1981, the account value would have been worth approximately $595,000. That's not bad for one of the worst 20-year cycles that included a big bear market, ten years of stagnating stock market returns and high inflation.

But the real story is what happened after 1981. Between 1982 and 1991, the individual's wealth would have accelerated from $595,000 to over $3.4 million. By following a simple buy-and-hold approach, the investor eventually benefited from the next bull market. It just took a while.

Acquiring wealth for retirement usually takes about 40 years. Most people start working in their mid 20s and hope to retire in their mid 60s. Consequently, the most recent cycle should not overly influence advice about long-term wealth building. During the late 1990s, investors became too enthusiastic about the future and took too much risk. Today, they are likely to be too pessimistic. The danger is that younger investors will either become too cautious and not participate at all, or attempt a more aggressive trading strategy that may lead to greater losses.

As always, I welcome you to contact me with any questions or concerns.

Sincerely,

Terence L. Horan, CLU, ChFC