I have a client that called me me $34k she wants to do something with. She just lost her husband and is in her late sixties. Very conservative. A single premium immediate annuity came to mind. To that end, who has a good solid SPIA that pays well? Also what are the pitfalls? Any detailed information you can share would be much appreciated as this is not my arena. Thank you very much in advance. The Dow dropped over 500 points yesterday and a thousand at the time of this writing, so it has to be a fixed product...
Advice for Newbie
- Thread starter MYOWNCO
- Start date
The DOW isn't open on Sunday's. I assume you meant Friday. And it has made a little bit of a comeback. At the writing of this, it is down 300. Also, people tend to forget, market corrections are a healthy thing. We had a 17% correction back in 2011. Most people have long since forgotten about that.
With that said, the movement of the DOW (and equity markets in general) have zero effect on a SPIA. Personally I think it's a terrible time for a SPIA unless the client just needs the income it would generate. And $34k isn't going to generate that much of an income. The reason it's a terrible time is because interest rates are near an all time low and only have one way to go, and that's up. The higher the interest rates, the higher the income on a SPIA. So if you did a SPIA now, you've locked in an income at one of the lowest interest rate periods possible.
If she doesn't need an income, just find a short term fixed annuity and put it there. Something in the 3-5 year range. You're probably only going to see rates in the 1.50%-3.00% range for those lengths.
That traditional thinking may hurt your clients in the long run. Interest rates might go negative, it would take a long time to make up any gains she coulda had by the time rates go up.
And regarding rates going up, no one in the HISTORY of the world has ever printed up TRILLIONS of dollars and manipulated the market this much. Even Ben Bernanke said rates won't normalize in his lifetime and he looks pretty healthy to me!
http://www.zerohedge.com/news/2015-03-18/ben-bernanke-was-right-no-rate-normalization-during-my-lifetime
https://drive.google.com/open?id=0B8l15UmJT7LvN0JUcjFtZGtpczQ
At the link is a sheet that shows the cost of waiting. It's comparing a money market fund to a bond at 3% (you can substitute myga) and how many years holding out for a higher interest rate that may or may not come it will take to make up what will be lost due to waiting, and what rate it would have to be to be equivalent...and looking at the sheet, I don't see rates going up nowhere near 4% for the rest of this decade...
Maybe an income rider she can stop would be a better idea IF she had worries about losing out on future rate hikes.
- 10,318
Reacting to the market out of fear is usually a terrible idea. The market dropping like that creates a great opportunity. I have spoke to 2 people already today who were on the fence about an IA, and I am highly encouraging them to jump in right now. Since the IA has a 0% floor, they have nothing to lose and plenty to gain.
A SPIA sounds like a horrible idea for this situation. It will generate around $200/m if she chooses life only with no COLA. It is especially a bad idea if she does not need the income.
You could just do a 5 year MYGA at 2.75%. That would grow her money on a guaranteed basis. Plus give her the chance to lock in higher rates in the near future.
But I would lean towards a 6 or 7 year IA. You want to buy on the dips. And even if the bottom fell out right after buying, you still have the 0% floor. She wont lose a thing.
A SPIA sounds like a horrible idea for this situation. It will generate around $200/m if she chooses life only with no COLA. It is especially a bad idea if she does not need the income.
You could just do a 5 year MYGA at 2.75%. That would grow her money on a guaranteed basis. Plus give her the chance to lock in higher rates in the near future.
But I would lean towards a 6 or 7 year IA. You want to buy on the dips. And even if the bottom fell out right after buying, you still have the 0% floor. She wont lose a thing.
So your thoughts are doing a SPIA is better than putting in a MYGA right now? Those were the two scenarios in my post. I'm not a fan of SPIA's in this environment. As a matter of fact, I'm an equity person. Even with the drop the past week (including today). But it's not my money we're discussing. The investor is supposedly very conservative.
In your "cost of waiting" piece, it's comparing investing in a 5 year bond at 3.05% to alternatives. I said an option was a 5 year MYGA with a top end of around 3%. Virtually the same as the 3.05% bond. So how does my "traditional thinking" hurt my clients when I've given them the same return as the bond in the "cost of waiting" piece?
No one is asking though if she NEEDS the income. She just lost the lesser of 2 social security checks.
MYOWNCO what does she need to do with the funds?
1. Grow it for unknown expenses in the future
2. Income
3. Legacy
4. Combination
MYOWNCO what does she need to do with the funds?
1. Grow it for unknown expenses in the future
2. Income
3. Legacy
4. Combination
I did address the income issue when I said,
Personally I think it's a terrible time for a SPIA unless the client just needs the income it would generate.
and
If she doesn't need an income,
"With that said, the movement of the DOW (and equity markets in general) have zero effect on a SPIA."
tell that to the FED who jumps in everytime theres a big correction.
"The reason it's a terrible time is because interest rates are near an all time low and only have one way to go, and that's up."
Again not true, you could have this party punch bowl of infinite printing of money to keep rates the same for years (go back to Ben Bernanke quote). Now the CBs want to get rid of cash, and in some countries bond yields are going negative, even one country introduced negative rate mortgages. Do you think with all the printing, leveraging, spoofing of the numbers, that we are immune to this?
So you think the Fed will/can lower rates more? I don't. They have nowhere to go on the downside.
Let's get back to the issue. And that is whether or not a SPIA is a good place for money. I say it isn't. You have spoken out against my advice but given none of your own other than you don't agree with me. So I'll go back to my question I asked in the post you responded to, but failed to answer.
So your thoughts are doing a SPIA is better than putting in a MYGA right now?
Again, the original poster mentioned doing a SPIA. So give us your thoughts on if a SPIA (assuming income isn't needed) is a good place for this $34k.
While you're at it, tell me why my MYGA at 3% is harming the client when the alternative you gave is a 3.05% bond?
