The Fed Rate Conundrum

[scagnt83]

Has anyone done any research or hypothetical projections on using an Income Rider as your income solution vs. typical deferral and then rolling to a spia?


With the Rider you get the higher growth. But if the Fed raises rates say... 1%, over the next 2 or 3 years... will the higher spia payout rates in the future be a better deal than having the growth now on an income rider?

Obviously this depends on the amount of time until income. But there has to be a breakpoint somewhere... or is there one at all?

Thoughts?

 

[scagnt83]

Has anyone done any research or hypothetical projections on using an Income Rider as your income solution vs. typical deferral and then rolling to a spia?


With the Rider you get the higher growth. But if the Fed raises rates say... 1%, over the next 2 or 3 years... will the higher spia payout rates in the future be a better deal than having the growth now on an income rider?

Obviously this depends on the amount of time until income. And obviously the longer you have until income the more it would make sense to transfer to a spia (since there is a higher likelihood that rates will be higher). But even for someone who is 4 or 5 years out from taking income. Say they get 4% from an IA in deferral. If rates are a full 1% higher in 4 years would it have been better to wait?But there has to be a breakpoint somewhere... or is there one at all?

Thoughts? Numbers?

 

[Justin Bilyj]

Rising interest rates smash down the markets, that's why they stopped that taper talk. I often wonder if its a good idea, having an indexed product when rates are uncontrollably gonna go up, the FEDS print money, the rate is rising, they don't print money, the rate is rising, it is inevitable. So would I want to be in something that indexes the market as they are getting pounded by higher interest rates? Atleast an annual pt to pt would be out of the question.

I think the spia at a later date would be better than the income rider, and more flexible of an approach. I am not a whiz with the illustrations so I have no numbers for you.

 

[Norwayguy]

Has anyone done any research or hypothetical projections on using an Income Rider as your income solution vs. typical deferral and then rolling to a spia?


With the Rider you get the higher growth. But if the Fed raises rates say... 1%, over the next 2 or 3 years... will the higher spia payout rates in the future be a better deal than having the growth now on an income rider?

Obviously this depends on the amount of time until income. But there has to be a breakpoint somewhere... or is there one at all?

Thoughts?

Since higher rates of SPIAs is not guaranteed when your client wants to annuitize. I would recommend doing your comparison with the rates built into the deferred contract you wish to compare with since those rates are guaranteed.

Then you get into the differences between Annuitization and withdrawals from riders and the flexibility that can be lost.

 

[scagnt83]

Its not the indexed accounts I worry about. Even if the market has a few bad years I feel that they are still well positioned. There will be plenty of 4% and 5% years to come in the market, and IAs will be well positioned to capture that.

Plus you always have the fixed rate account that you can allocate to. So when rates rise and the market falls the fixed account rates should rise.

Its the income rider vs. deferral/spia debate im interested in.

 

[goillini52]

Its not the indexed accounts I worry about. Even if the market has a few bad years I feel that they are still well positioned. There will be plenty of 4% and 5% years to come in the market, and IAs will be well positioned to capture that.

Plus you always have the fixed rate account that you can allocate to. So when rates rise and the market falls the fixed account rates should rise.

Its the income rider vs. deferral/spia debate im interested in.

I only dabble in annuities, but I really like the income riders!

 

[Tahoe Ray]

Its not the indexed accounts I worry about. Even if the market has a few bad years I feel that they are still well positioned. There will be plenty of 4% and 5% years to come in the market, and IAs will be well positioned to capture that.

Plus you always have the fixed rate account that you can allocate to. So when rates rise and the market falls the fixed account rates should rise.

Its the income rider vs. deferral/spia debate im interested in.

I'm not sure if I 100% understand your question but I'll take a shot at it...

For most products, I would say that 4-5 years out it is probably a wash at today's rates (assuming you're using a cash refund or some DB on the SPIA and that you're not using some crazy FIA like Sentinel). An increase in interest rates would likely make the SPDA/SPIA strategy a better deal from a pure income standpoint.

The interesting thing is, you could theoretically get the best of both worlds by using a short(er) surrender FIA w/ a rider and decent caps. If rates were to stay depressed, you could turn on the income under the rider and maintain flexibility. If they spiked, your return probably still wouldn't be drastically under that of a 5yr MYGA. Your biggest challenge would be rider fee drag. Then you could just annuitize your existing contract or 1035/transfer to a better SPIA.

I haven't done any broad analysis on this so I don't have concrete numbers. When we do a case design for a client, we test multiple approaches using varying assumptions and recommend the one that we feel is superior based on client objectives.

You'd probably need a research department to come up with a rule of thumb...

 

[Justin Bilyj]

What if the rates were gonna be low for years like Japan?
What if we deleveraged until 2035? What would the strategy be then?
I like to interject macrodiscussions...