Session 46 L, Optimum Use of Deferred Income Annuities. Moderator: James A. Miles, FSA, MAAA

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Session 46 L, Optimum Use of Deferred Income Annuities Moderator:

James A. Miles, FSA, MAAA Presenters:

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SOA Life & Annuity Symposium May 17, 2016

Matt Drinkwater, Ph.D., FLMI, AFSI, PCS

Assistant Vice President

Jafor Iqbal

Assistant Vice President

Optimum Use of Deferred

Income Annuities

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Optimum Use of Deferred Income Annuities

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Deferred income annuity (DIA) owners

Looking at DIA as part of the total portfolio and assumptions

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Strong finish in 2015 for DIAs

Source: LIMRA Secure Retirement Institute, U.S. Individual Annuities survey.

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Many similarities between DIA buyers and VA with GLWB/GMIB rider buyers

Buying Age Average Premium Average Deferral _Period

Mean 59 years $133,600 8.3 years

Median 60 years $95,200 6.0 years

Source: Income Annuity Buyer Study, (To be published), LIMRA Secure Retirement Institute, 2016. Based on 53,650 contracts issued between 2012 and 2015 by 11 companies.

75%

of DIA buyers chose

deferral periods of 10 years or less.

96%

of DIA contracts sold have features

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74 %

IRA/Qualified Contracts 74%

Average size of qualified contracts is $132k slightly lower than non-qualified contracts

47

%

Women 47%

Average contract size is $111k, nearly 30% smaller than contracts owned by men

66

%

Refund options before death

Only 34% of DIA have been bought without any death benefit before the payment begins

31%

Joint Lives

Average contract size is $178k, nearly 60% bigger than single life contracts

DIA Owners

Based on 53,650 contracts issued between 2012 and 2015 by 11 companies

Most DIAs are purchased with qualified money and nearly one third are joint contracts

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Majority of DIA sales are from replacements, and mostly sold by career agents and FSNB-Ds

DIA Sales by Channel – 2015 (EST) Banks 4% Career 58% Full service nat. B-D 29% Direct 1% IBD 4% Indepen dent 4% TOTAL - $2.7 billion

DIA Sales by Funding Methods

New 35% External Replacement 43% Internal Replacement 22%

Source: LIMRA Secure Retirement Institute, U.S.

Individual Annuities survey,

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Why is it important?

DIA income, by design, goes up with a longer deferral period.

$12,371 $18,434 $28,252 $46,861 $88,543 $0 $15,000 $30,000 $45,000 $60,000 $75,000 $90,000 Age 50 55 60 65 70 75 80 85

Age when payments begin

50-year old male

Annual DIA Payouts on $100k investment

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Why is it important?

DIA income, by design, goes up with a longer deferral period.

But the extent to which income increases depends on buying age.

$88,543 $76,116 $66,406 $53,923 $0 $15,000 $30,000 $45,000 $60,000 $75,000 $90,000 Age 50 55 60 65 70 75 80 85

50-year old male 55-year old male 60-year old male 65-year old male

Annual DIA Payouts on $100k investment

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Clients need to decide:

• At what age to buy?

• What deferral period to

select?

• What proportion of the

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Why not consider a DIA compared

to assumed withdrawal rates and

investment returns?

• Manage trade-offs

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Assumptions for DIA analysis - 1

• Age 55, 60 or 65 year old male –to retire at age 65 • Proportion of portfolio applied to DIA:

0%, 10%, 20%, 30% or 40%

• DIA deferral period – 5, 10, 15, 20 or 25 years (earliest age 65, latest age 85)

• Moderate portfolio during retirement:

• Large-company stock funds (42.5%), Small-company stock funds (17.5%) and Intermediate-term Govt. bonds (40%)

• Initial annual withdrawal rate 4.5%

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Assumptions for DIA analysis - 2

• Portfolio fee is 1.50% annually

• Pre-tax income in nominal dollars

• DIA payout is received at the beginning of each month before investment gains/losses

• Portfolio is not rebalanced due to DIA purchase • No emergency or urgent need to make lump

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CASE ANALYSIS

Zero-return (net of fees)

investment portfolio during

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0% 10% 20% 30% 40% 50% 60%

Age 65 Age 70 Age 75 Age 80 Age 85

Investor age/DIA deferral period

100% moderate portfolio/0% DIA

Retirement Income Uncertainty Level 23% Low High

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18% 14% _12% 11% 17% 0% 10% 20% 30% 40% 50% 60% Age 65/Defer

5-year Age 70/Defer10-year Age 75/Defer15-year Age 80/Defer20-year Age 85/Defer25-year

100% moderate portfolio/0% DIA 80% moderate portfolio/20% DIA

23% Retirement Income Uncertainty Level Low High

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Notables:

• U-shaped relationship for DIA investment

• Outcomes vary significantly with length of DIA deferral period

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What happens when we apply

less or more than 20% of the

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0% 10% 20% 30% 40% 50% 60% Age 65/Defer 5-year Age 70/Defer 10-year Age 75/Defer 15-year Age 80/Defer 20-year Age 85/Defer 25-year

100% moderate portfolio/0% DIA 90% moderate portfolio/10% DIA 80% moderate portfolio/20% DIA 70% moderate portfolio/30% DIA 60% moderate portfolio/40% DIA

Retirement Income Uncertainty Level Low High

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More Notables:

• Short deferral period fails to capitalize on the mortality credits offered for higher ages • Long deferral periods expose remaining

portfolio to the uncertainties of market, inflation and sequence of return risk

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Retirement Income Uncertainty Levels for

a 65-year old male

40% DIA Age 75/Defer 10-year Uncertainty level 10% 0% 10% 20% 30% 40% 50% 60% Age 70/Defer

5-year Age 75/Defer10-year Age 80/Defer15-year Age 85/Defer20-year

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0% 10% 20% 30% 40% 50% 60% Age 65/Defer

Retirement Income Uncertainty Levels for

a 55-year old male

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Retirement Income Uncertainty Levels for a

55-year old male

(pre-retirement portfolio subject to market volatility)

Investor age/DIA Deferral period

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Retirement Income Uncertainty Levels for a

60-year old male

(pre-retirement portfolio subject to market volatility)

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Conclusions:

• DIAs can reduce retirement income uncertainty significantly, if

used judiciously.

• Maximum effectiveness of a DIA depends on the age an investor

buys, how much is invested in a DIA and, most importantly, the income deferral period.

• The more predictable the retirement portfolio or the expected

retirement income are, the easier it is to illustrate DIA benefits.

• To maximize DIA benefits, older investors typically may need more

of their portfolio to invest in a DIA.

• It is “not how big the DIA payouts are, but how DIA can work in

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Thank you

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