Portfolio Income Guarantees (P.I.G.)
05/03/2012 7:45 am EST
If you thought a P.I.G. has something to do with the Euro debt crisis, then you might be missing a new strategy to protect your retirement assets from the next Big Crash, writes Stan Haithcock of Stantheannuityman.com.
Being known by and living the life of “Stan The Annuity Man,” my world is obviously focused solely on annuities. I represent almost every carrier in the country, and feel that specific fixed annuity strategies are a perfect “transfer of risk” for a portion of one’s portfolio.
However, when I see a good new idea—even if it is not an annuity—it’s my duty as the country’s Annuity Consumer Advocate to make sure that my readers and clients know about it.
Yes, this article is about income, but not really about annuities. Stan The Annuity Man is taking a little bit of a detour here. The new strategy is about a P.I.G.!
Portfolio Income Guarantees. The industry name for this P.I.G. is Stand Alone Living Benefits, but I think Portfolio Income Guarantees is a more self-descriptive term.
What is a P.I.G., you ask? It is an annuity-type income benefit attached to your current portfolio. In essence, it’s an annuity income stream guarantee without having to buy an annuity. Think of it as an income rider (attached benefit), but on a fee-based account.
It’s for all of you “masters of the universe” out there who know deep down that you need income guarantees, but you want to keep your investments outside of a typical annuity structure. The P.I.G. might be the income answer to “having your cake and eating it too.” Before the P.I.G., the only way you could contractually guarantee a lifetime income stream was to purchase a traditional deferred annuity.
Think of the P.I.G. as an insurance policy on your investment account. When you invest in equity markets you accept risk, and over the past ten years investors have experienced market risk first hand. With the P.I.G., you can actively invest knowing that the worst-case scenario is a specific income for the rest of your life, with none of those dreaded annuity surrender charges.
This P.I.G. benefit is gaining in popularity as baby boomers age and market volatility increases. If you are the type of person who wants to participate in the market for the opportunity it presents, and you want to guarantee that your lifetime income stream is contractual, Portfolio Income Guarantees (P.I.G.) are a true “no brainer.”
There are three primary concerns facing individuals in retirement:
- longevity risk
- inflation risk
- adverse sequence of return risk.
Each concern is unique in the risk it presents to individuals and if or when it will take place. A good friend of mine had open heart surgery, and the doctor told him the surgery statistically results in a 94% success rate for patients. My friend asked about the other 6%.
"They died," the doctor sadly replied. My friend then fully understood what 6% meant.
The three risks defined here are real, but they may never happen to you. P.I.G. benefits are designed to protect investors just in case they are in the 6%. Let’s review the three risks.
Longevity risk has become more apparent to individuals as more and more people live well into their 80s and 90s. In fact, men aged 65 have a 50% chance of living until 88, and a 25% chance of living until 95.
The primary advantage of the P.I.G. is that you don’t have to worry about how long you live, because you will still receive your guaranteed lifetime income stream.
Inflation risk has always been a concern for most investors. Having a stagnant income coupled with a higher cost of living is not a winning combination. A simple example: at 3% inflation, you will reduce your purchasing power by 45% over 20 years.
In an environment like today, when interest rates are effectively zero, keeping pace with inflation is almost impossible. For this fact alone, more retired people are investing in stocks to generate higher income, but in doing so have exposed themselves to greater risk of principal.
This is all the more reason to have the P.I.G. contractual guarantees as one way to offset the risk of inflation. If the markets perform well, you will capture the gains to grow your future income withdrawal annually. If interest rates rise, the income guarantee calculation for the P.I.G. will increase, because it is tied to the ten-year Treasury bond. Therefore, you have three ways your income can increase over time with Portfolio Income Guarantees.
Then there is the concern of adverse sequence of return risk. What if the year you started to take income from your portfolio was 2008 and the market fell 30%? Compare that to starting income from your portfolio in 2009, when the market climbs 30%.
This is a prime example of adverse sequence of return risk. In both cases, you started with $500,000 and took an income of $30,000. The first income example would end the year with $320,000, and the second example would end with $620,000.
With the P.I.G., the first person would still receive income for the balance of their life, even if their portfolio balance went to zero. No one knows when adverse return risk may happen, or if it will happen, but having the peace of mind to be protected against the loss of income is priceless as you advance into retirement.
So you might need to decide if you are one of those people who would benefit from this new type of portfolio income guarantee. The P.I.G. might be something to take a closer look at…especially for those of you that have a vomit reflex when someone even says the word “annuity.”
A news reporter recently called me the National “Annuity Consumer Advocate” in the same vein as Ralph Nader and Clark Howard are for other products and services. I hope to continually educate the public on the complex and sometimes ugly world of annuities.
I just published The Annuity Stanifesto, fully explaining in an easy-to-read format how these misunderstood and misrepresented products actually can work within your portfolio. You can get a free copy of The Annuity Stanifesto by <going to my Web site and downloading your copy.