Do as the Romans did — with annuities
June 5, 2013 by Stan Haithcock
The Romans made a few major mistakes, but they got it right when it came to annuities and lifetime income planning.
Annuities have been around since the Roman Empire, and I have always tried to envision the first annuity lunch seminar with some guy in a toga talking about a too good to be true product as other people in toga’s gorge themselves on a free Roman buffet.
Most agree that the Roman’s were first to the annuity party, but some financial archaeologists argue that annuities actually existed in Egypt from 1100 to 1700 B.C. when a prince from someplace called Sint in the Middle Empire created the first annuity payment plan.
In Rome, annuity solutions for Roman citizens were simple lifetime income strategies that became the genesis for today’s Single Premium Immediate Annuity structure.
Annuity time line
It’s kind of interesting to look back at a time line of annuity growth after the Roman’s started it all.
1600s — European governments started to use annuity type strategies to pay for wars and public works type projects. Early individual annuities were called “tontines.” These were “life only” annuity payments to a family and the lifetime income actually increased to surviving family members.
1700s — After the British Parliament approved annuity sales to the public, the British elite and other rich Europeans were the primary users of annuities as transfer of risk strategies to hedge riskier investments.
1759 — The first fixed annuities arrive in America as a lifetime retirement payment plan for church pastors in Pennsylvania.
1776 — The National Pension Program for Soldiers was passed even before the Declaration of Independence was signed. These early annuities provided lifetime income payments to the soldiers and their families.
1812 — The first time commercial annuities became available to the public began with the founding of The Pennsylvania Company for the Granting of Annuities.
1905 — All around smart guy Andrew Carnegie founded the Teachers Pension Fund, which in 1918 turned into the Teacher’s Insurance Annuity Association (TIAA). Teachers still benefit from these annuity offerings through the same company now known as TIAA-CREF.
1930s — When the Great Depression hit, investors started turning to annuities as a safe place from volatile markets.
1952 — The first deferred variable annuity was introduced by TIAA-CREF.
1986 — Congress passed tax law that allowed people to benefit from tax deferral using annuities with no limitations on the amount of money invested.
1995 — The first Fixed Index Annuity was offered by Keyport (now Sun Life). No, they weren’t inappropriately called “hybrids” back then! However, I do think this could be the start of the bad annuity lunch seminar.
Roman soldiers were paid annuity lifetime payments as a form of compensation for their military service. Back then, and really up to 1952 when the first variable annuity was introduced, the only annuity structure available was the Single Premium Immediate Annuity (SPIA). The SPIA is the original design, and in my opinion, still the most pro customer. Some call SPIA’s income annuities or pension annuities, and they are correct on both accounts.
MarketWatch’s retirement guru, Robert Powell is right on the money with his latest article “Annuities as income, not investments.” This is by far the best article I have read this year on the subject of retirement income. The sources provided in the article are phenomenal. The article references a recent study, Framing Lifetime Income, where coauthor Jeffrey Brown said “Guaranteed lifetime income, such as in the form of annuities, is incredibly valuable for retirees.” This is now officially the understatement of the year.
Most annuities sold today are deferred annuity products like variable annuities or fixed-indexed annuities because that’s what most agents choose to sell. This is also a direct reflection of the public and advisers continuing to focus primarily on building and growing wealth. Even though all deferred annuities can be “annuitized” or turned into a Single Premium Immediate Annuity, most deferred annuitization quotes offered by variable and fixed-indexed annuities aren’t competitive when compared side by side to stand-alone Single Premium Immediate Annuity quotes.
With the introduction of Longevity Annuities in 2004, this new strategy created a simple pension alternative to the heavily promoted income riders that are traditionally attached to deferred annuities like variable and fixed-index annuities. Longevity Annuities work similarly to Single Premium Immediate Annuities except that the income stream is turned on at a specific date in the future instead of immediately. Both have no annual fees and pay low commissions to the agent when compared with most deferred products.
Sometimes the original product design always proves to be the best. Classic Coke is great example of this. The same can be said for the Single Premium Immediate Annuity “Roman” strategy.
The original Roman annuity design has stood the test of time, and still is the best and most efficient annuity strategy available. And with only two lifetime income solutions needed, income now or income later, longevity annuities now offer an easy to understand simplistic “Roman” solution for future income.
So when it comes to annuities, always remember to “Do as the Romans did” when solving for your lifetime income needs.
