When are Immediate Annuities Better than a Hybrid Annuity? - YouTube

Eric: Hi, I'm Eric Judy. Dick: And I'm Dick Van Dyke. Today, we want to talk

about immediate annuities and do a little comparison with immediate annuities and

why you might consider an immediate annuity. Eric: One of the things we often

hear, in today's world, where you have this hybrid annuity, which gives you

lifetime income as well as some other bonuses/extras, why would you ever want to

actually look at using an immediate annuity, where you're going to give up

your assets? Dick: Right. That is the difference, Eric. When we think about the

hybrid annuity, it's kind of your cake and eat it too annuity, where you can get your

lifetime income, but you don't have to give up your asset. Yet, there is a place

for an immediate annuity. In fact, let's do a little history lesson. How about some

trivia here? When we think about an immediate annuity, it literally goes back

to the early Roman Empire. They called it the "annua," and that's where the word

annuity comes from. So it is a very early form of an annuity, and it has really gone

through the test of time, spanned the centuries. Eric: So next time you have

your toga on, you'll know to get your annua language out. Exactly. It's an old

standard. It was the first kind of annuity out there, the standard lifetime annuity.

You gave up a lump sum, and you got a lifetime income stream. Dick: It is

probably the truest pension-style income. In fact, immediate annuities, a lot of

companies will offer a choice of a lump some or an immediate annuity. Eric: I

talked about immediate annuities with a lot of clients, when they were saying,

"Hey, I've got a 401(k). I want a lifetime income. What can I do to get my own

personal pension?" Dick: Yes. Eric: That's kind of how we think of it. The thing is

you're usually giving up that 401(k) in exchange for that lifetime income stream.

Now, the big thing here is you realize that none of those dollars are going on to

heirs. Dick: Yes. Well, in a true pension, there's no money in a pension, as a rule.

When you have a pension, when you pass, the money ends, or if you've chosen a

survivorship option, you've probably taken a little bit lower payment on your

pension, and then some of those payments will go on to perhaps a spouse. Eric:

Exactly. When I grew up, my parents were educators. So they had a traditional kind

of benefit program, where they have a retirement that's there as long as they

live. The bad thing is, once they're gone, nothing goes on to me. Being a little

self- serving here now. The 401(k) plan . . . Dick: Why didn't they get a hybrid

annuity? Eric: Exactly. Why can't they get a hybrid annuity? So when they're looking

at it, that's the old style. The hybrid, on the other hand, allows you to pass some

of those dollars on to heirs typically. Dick: Right. So, really, where the

immediate annuity fits, let's just give some examples. Someone who really wants to

start income right now. Eric: With an traditional immediate annuity, typically

you're going to get a higher payout than you would with a hybrid. Dick: Yes. Eric:

You're going to start with a little bit higher. . . Dick: Typically. But we have

seen a few instances where . . . you've got to run some illustrations to know.

Eric: Exactly. So that's one of the things that when people are going that direction,

that's usually the reason. Dick: General assumption is you're going to get more

income. Eric: A little bit more. A higher percentage to start with. Dick: Right.

Then the other key factor would be that, perhaps, if you're going to use an

immediate, you really aren't as concerned about giving money over to heirs. Eric:

Right. Are there ways to get money on to either survivors or heirs? That's one of

the things we . . . Dick: With an immediate? Eric: An immediate annuity. You

can structure it so that it's a joint lifetime payout. So if you and a spouse

purchase an immediate annuity, you can set it up so that it is the lifetime of both

of you or either of you. Whoever lives the longest, those payments will continue.

There are little tweaks that you can even do there, where you can set it up so that

once one passes, it sometimes reduces by a percentage. Dick: A percentage, so they

only get three-quarters or one half of the annuity. Eric: Right. The other way that

you can somewhat pass on dollars to heirs is there are a couple of things. You can

do a period certain, where it's lifetime with a certain number of years guaranteed.

A lot of times you'll see somebody do a lifetime annuity with 20 years guaranteed.

So that 20 years of payments is guaranteed. Dick: So if I pass in 5 years,

somebody is going to get another 15 years of payments. Eric: Correct. Dick: But what

does that do to my income? Eric: It's going to reduce your payments. You have to

realize going in, if your goal is the highest payout possible, you don't want to

add any of these other pieces. But if you're wanting to try to pass on money to

somebody, that's a way of guaranteeing basically that some of that comes back.

One of the things I always look at is either the installment refund or the cash

refund, which says once you purchase the immediate annuity, if you haven't gotten

back at least what you paid in principal wise, that amount will be refunded either

to your heirs or to your estate. Dick: Well, isn't that the installment refund?

Eric: The installment refund keeps the payments coming back to your return of

principal. Dick: Okay. So you're talking about the full lump sum. Eric: Yes, just a

refund of whatever you've put in, so it's either a lump sum or installment refund.

Dick: One of the biggest vulnerabilities that Eric and I look at with our clients,

and what we think you should be concerned about, is inflation. That is probably one

of the biggest vulnerabilities we face. We have had historic inflation the last 4

decades of over 4%. We believe that the stage is really set for some higher

inflation over the next two or three decades, which is going to cover most

retirees. So if we would happen to go through a stretch of 4% or 5% - I'm not

talking about runaway hyper third world country inflation - but if we're talking

4%, 4.5%, 5%, 6% inflation, that makes that immediate annuity, if you have no

inflation cost of living adjustment, a COLA on it, it really puts you at a

disadvantage. Eric: Yes, especially if you've got longevity in what you're

looking at. You realize you're taking a level payment and you're stretching it

over your lifetime. So your purchasing power is going to diminish with inflation.

Dick: Right. So one of the things that we do suggest, very strongly, is that

whatever type of annuity, whether it's an immediate annuity, a hybrid annuity, a

deferred annuity where you're deferring it for a long time, that you're really taking

inflation into account. There are different ways to structure for inflation,

but if you're not taking it into account, you're really setting yourself up for a

bad situation. Eric: Right. That's another aspect that you can add to an immediate

annuity. Some of them you can add a cost of living adjustment. Others have a fixed

percentage. Dick: Tied to a consumer price index or a fixed percentage. Eric: So

those are things you can add, but you realize you're going to start lower. Dick:

Your payments are going to start lower. Right. Eric: So it's all about the

tradeoffs. Dick: I love the idea of a real cost of living adjustment. So if things

get carried away and we start seeing 5% or 6% inflation, we've covered a major

vulnerability in a retirement plan. Eric: Yes. That's what we're looking at here.

When we're looking at immediate annuities, we're looking at you creating your own

personal pension. Dick: yes, that's right. Eric: If you're into this marketplace,

where you're going to create a personal pension, and you have that magic number

you know that you need to hit and you can anticipate the growth, that's where this

product really comes in. Dick: So if we're to kind of wind up this discussion on

immediate annuities, being a true pension-style income, where would we

summarize that this is going to fit? What type of person should buy an immediate

annuity, should really consider it for their retirement portfolio? Eric: I always

say it's someone with no heirs, that doesn't have to worry about passing on

dollars to somebody in the future. They're not worried about that. They want the

highest payout now, and that's really the person that I start with. Dick:

Right. I think that, in winding this up, we just want to say, do a fair comparison.

You may be the ideal person for an immediate annuity, but get with a

professional advisor, run some illustrations, compare it. We have

actually seen situations where a hybrid annuity can right off the bat outperform

an immediate annuity. It's not often, but it does happen. Eric: Yes. Very good.

Dick: Thank you. Eric: Have a great day.