Annuity FYI Blog

Investment News‘s Darla Mercado summarizes her interview with the Insured Retirement Institute’s president and chief executive Cathy Weatherford in “Hurdles ahead for VA industry.”  With advisers wary of the increased costs associated with variable annuities after the financial crisis and increasing regulations on insurance providers, there may be a challenging road ahead for variable annuities.

Products have been simplified in order to ensure that insurance companies are able to keep the guarantees that clients find valuable with annuities.  While prices have increased from the “bargains” consumers were previously receiving, the new prices are fair for both consumers and the insurance companies.  The biggest challenges Weatherford sees with advisers will be getting their time and overcoming any skepticism regarding the changes in variable annuities.  It is also crucial for insurers and advisers to ensure suitability for the their clients through closely following FINRA’s regulations.  In the upcoming year, Weatherford believes that suitability laws, rules, and regulations will be addressed even more on both state and federal levels to ensure the success of the variable annuity industry.

In a PR Newswire press release “How to Compare Annuity Features and Choose the Right One,” there is a summary of annuity tips taken from financial blog ChristianPF.com.  Since each consumer has a different situation, it is in your best interest to know the benefits and drawbacks to the different types of annuities.

Often considered the safest type of retirement vehicle by financial advisers, fixed lifetime annuities allow consumers to purchase guaranteed income for life.  With a fixed term annuity, the idea is the same but the time period is fixed at purchase, i.e. 5, 10, 15 years or more.  While it’s difficult to know exactly how long one will live, fixed annuities are also good for consumers who know that their need for income will lessen as they age.

Variable lifetime annuities and variable term annuities have the same time frame principal as the fixed annuities, but base the monthly income payments on the market and the underlying fund that the variable annuity is based upon.  With any annuity purchase, it is important to research the financial adviser that you go through rather than looking for the best deal.

The article mentions a few other options worth looking into.  Cost of Living Adjustments (COLA) attached to an annuity will account for inflation and cost of living increases so that your monthly payments rise over time.  By purchasing a Joint or Survivor Benefit rider, you guarantee that your spouse or another heir will continue receiving your monthly payments.  Since a 401k annuity rollover or IRA transfer are tax free, using that money to purchase an annuity is in your best interest.

In “It’s Spee-Ahz, By a Nose!” from the Retirement Income Journal, Kerry Pechter summarizes a detailed study stating the best strategy for retirement is a combination of income annuities and mutual funds.  Mark J. Warshawsky, a former U.S. Treasury official, and Gaobo Pang, a former World Bank economist, are both consultants with Watson Wyatt Worldwide.  In order to both generate an income and leave money to ones heirs, their study recommends putting 25% of your savings into an annuity when you are ready to retire.  Many income-phase experts also recommend combining the two retirement strategies.  Even though many firms offer this kind of retirement plan and it makes sense since mutual funds maximize returns while annuities maximize income, it has not become widely popular or successful yet.

In the study “Comparing Strategies for Retirement Wealth Management: Mutual Funds and Annuities,” Warshawsky and Pang studied six ways to invest $1 million at age 65.  They ran the strategies through Monte Carlo simulations using thousands of scenarios, many different fee and asset allocation combinations, and the assumption that all investors lived to be 100 years old.  Their results showed that the SWiP strategy would have the greatest wealth at age 100, but potentially the lowest yearly payouts.  All of the annuity only options gave a higher annual income but had little value at age 100.  The two strategies that mixed mutual funds with annuities were in the middle of those extremes.  The highest income level and likely long term wealth was with the mutual fund/SPIA hybrid.  Their motivation for the study was finding a way for defined contribution plan participants to create retirement income from their savings.

According to “Annuities: Boring is Better” by Peter Keating in Smart Money Magazine, immediate life annuities are the simplest form of the product and are best for many investors.  Even for those retirees that plan for their future with a hefty portfolio, the risks of inflation and longevity could override all that planning.  That is where annuities come into play.  With an immediate life annuity, you can make a 401k annuity rollover to purchase the annuity from an insurance company in return for guaranteed lifetime payments.  In the article’s example, the investor receives a payout each year equivalent to 8.4% of their original investment.  While that percentage isn’t exactly comparable to bonds or savings accounts, there is a large tax benefit because all payouts from your initial investment are tax-exempt.

While Keating advises some investors to stick with the basics when it comes to annuities, he acknowledges that some annuity “bells and whistles” add great benefits.  The guaranteed minimum payout option ensures that your heirs receive payouts for 5 or 10 years if you pass away.  Inflation-indexed annuities start with a lower monthly payment, but increase by a percentage over the years to keep up with the rising cost of living.  Keating believes that purchasing a basic immediate annuity is good for the majority of retirees, while the other types of annuities have different benefits for different types of investors.

In “The Four Types of Annuities” by Stephen P. Poitevint of The Post-Searchlight, Poitevant explains the four basic types of annuities.  Annuity products in general are increasing in popularity because investors want to make sure that their money lasts as long as they do.

Fixed annuities offer a guaranteed principal and interest rate with an up front purchase from an insurance company.  Fixed annuity rates vary but are currently around 4.5%.  Indexed annuities are a type of fixed annuity where your principal is guaranteed but in exchange for giving up your guaranteed interest, you receive the chance to earn added interest based on a stock market index increase.  Investors like this type of annuity because of the “floor” associated with it:  the value will not fall if the market does.

Variable annuities are based on the performance of the market and do not guarantee an interest rate, but a death benefit rider will ensure that your beneficiaries will receive at least the principal you invested, even if your account has declined in value.  There are many additional riders that can be added to your purchase with additional guarantees at a cost.  The first three types of annuities offer a stream of income starting at some point in the future, but immediate annuities begin payouts immediately.  The time frame you will receive payments is determined at the purchase and can last for any time frame up to life.  The most common type is lifetime or 20 years, which is known as “life or period certain” and immediate annuities can be either variable or fixed.