Annuity Riders

Hi. My name is Ryan Hinchey. I am a variable annuity consultant. Annuities are complicated. I help people make sense of them.

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Catching Elephant is a theme by Andy Taylor

 

The VA industry is becoming increasingly top heavy.  As discussed in this WSJ article, the top 4 variable annuity players now make up 48% of the 2010 industry sales!   Consumers would be best served with healthy competition and a wider dispersion of market share.  If nothing else, advisors should be thinking about not putting all their consumers’ eggs in one basket, but rather spread their annuity investment among several companies - including a mutual company (which traditionally have the highest ratings in terms of financial strength). I also think that more work needs to be done in fitting the annuity with the purchaser.  Not every investor needs the richer (& more expensive) features if they are not going to use them.  But I have a bad feeling that commissions are driving these decisions more than anything else.   Fingers crossed on a more competitive annuity landscape in Q4 & 2011.

The VA industry is becoming increasingly top heavy.  As discussed in this WSJ article, the top 4 variable annuity players now make up 48% of the 2010 industry sales!  

Consumers would be best served with healthy competition and a wider dispersion of market share.  If nothing else, advisors should be thinking about not putting all their consumers’ eggs in one basket, but rather spread their annuity investment among several companies - including a mutual company (which traditionally have the highest ratings in terms of financial strength).

I also think that more work needs to be done in fitting the annuity with the purchaser.  Not every investor needs the richer (& more expensive) features if they are not going to use them.  But I have a bad feeling that commissions are driving these decisions more than anything else.  

Fingers crossed on a more competitive annuity landscape in Q4 & 2011.

The Wall Street Journal had an in interesting article regarding the (lack of) inflation adjustment for social security (here).   In the article, they reiterate a common feeling that measuring inflation is a “clumsy practice.” “We have to use these average weights” in the consumer-price index, says Ken Stewart, an economist at the Bureau of Labor Statistics. “If you spend more on medical care, tobacco, college tuition — these are items that over the past 25 years have gone up faster on average than other items. If you’re spending more money on consumer electronics and TVs and things that have fallen in price, you may not see any inflation out there.” The key takeaway here is that having retirement income linked to inflation is just not as safe as people may write if off to be.  If one’s personal consumption differ’s widely from the generic basket, then the inflation realized by the individual will be widely different.  Now this could be a good or bad thing depending on if one is buying more electronics or more medications.  But I’m guessing more retirees are in the same boat as the person who left these comments :  “Just found out the the co-pay on my name brand medications will rise 792% next year. No COLA (cost of living adjustment)? BS.”

The Wall Street Journal had an in interesting article regarding the (lack of) inflation adjustment for social security (here).  

In the article, they reiterate a common feeling that measuring inflation is a “clumsy practice.”

“We have to use these average weights” in the consumer-price index, says Ken Stewart, an economist at the Bureau of Labor Statistics. “If you spend more on medical care, tobacco, college tuition — these are items that over the past 25 years have gone up faster on average than other items. If you’re spending more money on consumer electronics and TVs and things that have fallen in price, you may not see any inflation out there.”

The key takeaway here is that having retirement income linked to inflation is just not as safe as people may write if off to be.  If one’s personal consumption differ’s widely from the generic basket, then the inflation realized by the individual will be widely different.  Now this could be a good or bad thing depending on if one is buying more electronics or more medications.  But I’m guessing more retirees are in the same boat as the person who left these comments : 

“Just found out the the co-pay on my name brand medications will rise 792% next year. No COLA (cost of living adjustment)? BS.”

David Babbel & His “Controversial” Annuity Study

The Wall Street Journal recently published an article entitled: “Beware of ‘Independent’ Investing Research”.  In the article it discusses a study on annuities that was performed by University of Pennsylvania’s Wharton School, led by David Babbel.  The controversial title of the WSJ articles stems from the fact that the study was co-sponsored by New York Life.

For anyone looking to read the study it can be found here:

Investing Your Lump Sum at Retirement, David F. Babbel and Craig B. Merrill,  August 2007 (11 pages)

which was based off of:

Rational Decumulation, David F. Babbel and Craig B. Merrill, May 2007  (36 pages).  

Both were co-sponsored by the Wharton Financial Institutions Center and New York Life Insurance company.  

I would like to think that professors at our most prestigious universities have higher ethics than those on Wall Street, but I can understand those who believe their is a conflict of interest.  However at the end of the day, I think this nets a positive for society to have our top academic minds studying the retirement issues that many baby boomers face.  But please, read the study for yourself.  Read the assumptions and reach your own conclusion on the validity of his findings.