There is an annual study that comes out every year by the Employer Benefit Research Institute and it always has many interesting stats. The one that jumped out at me this year was the fact that 4 out of 5 employees were interested in products that would provide a guaranteed income for life (GIFL).
Why is that? I’ll explore the reasons below.
What is a GIFL product?
It’s when you give a lump sum amount of money to an insurance company who guarantees a payment every year for as long as you live. This could be an immediate payment or deferred.
The financial services/insurance industries are funny in the sense that there are two distinct opinions about GIFL products.
What are the two schools of thought?
1) They are terrible products that shouldn’t be used.
2) They are invaluable products that many clients should use.
It’s tough to find a more polar opposite point of view, but it’s really quite a debate by advisors in the industry.
Why would advisors NOT offer GIFL products to clients?
They say they are too expensive. They say that the products are simply giving the client back his or her own money. They say that the client can get the same or a better outcome by using a proper mix of stocks, bonds, and mutual funds.
Why would an advisor OFFER GIFL products to clients?
To provide certainty that a client will never run out of money as long as he/she lives.
Both to a varying degree. GIFL products do give the client back his/her own money. There is an expense to an annuity with a GIFL rider. But it is impossible to provide the same or better outcome to clients with a mix of stocks, bonds, and mutual funds without taking significant risk in the process.
GIFL products will pay a client every year no matter how long they live. So if someone lives to age 90, or 95, or 100, the product will keep paying the agreed upon amount every single year.
Do you know when you are going to die?
It may seem like a dumb question because no one knows when they are going to die, but if that is the case, then doesn’t it make sense to allocate some amount of money toward a product that will guarantee you an income stream even if you live to age 100?
Example of a GIFL product
Let’s look at a 55-year old who has $1,000,000 in an IRA which is his/her main nest egg that MUST last throughout the rest of his/her life.
If the client put $500,000 of that money into one of the better GIFL annuities in the market, the client would receive a $49,500 GIFL payment every year for the rest of his/her life starting at age 65.
The next questions are…is that any good?
Did we get our money’s worth out of the annuity? Could we have done better investing it in a proper mix of stocks, bonds, and mutual funds?
Well…if you let $500,000 grow at 5.5% for the first ten years and then let it grow at 3% in the income phase starting at age 65, you’d run out of money at age 89.
That seems doable for a proper mix of investments doesn’t it?
However, what if the example client’s portfolio lost 35% of its value in the year of retirement like a 60/40 (stock to bond) portfolio lost in 2007? Then the portfolio would run out of money at age 77!
Well, then let’s assume the money grew the first 10 years at 8% but also lost 35% the year of retirement? The portfolio would run out of money at age 81.
I wouldn’t want to risk running out of money at age 77 or age 81.
Do you or your financial planner know when the next stock market crash is coming?
Nope and this is the reason that for clients who don’t have a bunch of extra money to absorb losses in the stock market to look to GIFL for certainty or what is also known as peace of mind.
Yes, you can generate significantly more money using stocks, bonds, and mutual funds. But the risk is real that something will go wrong and you won’t have the budgeted amount of money in retirement.
While the employees who took the survey are not experts in financial planning, they have their own life experiences of investing in the market and they have fears about running out of money in retirement. As such, it makes total sense that 4 out of 5 are interested in GIFL products. These products are not for everyone, but they can play an integral role in the financial plan for many.