RETIREMENT
an amount of guaranteed income payments even if you live well into your 90s or beyond . Just like people buy life insurance in case they die young , you buy annuities should you live past your life expectancy .”
Steve Parrish , co-director of the American College of Financial Services ’ Center for Retirement Income in King of Prussia , Pa ., agrees . “ Annuities should be looked at as longevity insurance ,” he says . “ No one wants to eat cat food and live in their car because they exceeded their life expectancy .”
A Hedge Against Forced Selling
An annuity ’ s payment stream can be especially valuable in a down year for the market . The guaranteed income “ acts as a hedge against the forced selling of parts of a portfolio at depressed values to fund living expenses ,” says Theodore Saade , a managing senior partner at Signature Estate & Investment Advisors in Los Angeles .
Saade suggests that annuities make up no more than 20 % of a household ’ s liquid net worth , however — a “ sliver of the portfolio ,” he says , “ that clients can look to as part of the ‘ sleep well at night ’ portion of their overall plan .”
Annuities are often viewed as an antidote to financial uncertainty . “ In today ’ s hyper-uncertain economic environment , protecting retirement income has become a top goal for investors ,” says Cyrus Bamji , chief communications officer at the Alliance for Lifetime Income in Washington , D . C .
Some experts , he says , even consider “ protection ” as a new asset class — a category that he says annuities can fill perfectly . “ Adding annuities to the mix can create a comprehensive , more resilient , and modern retirement portfolio ,” Bamji says .
Not For Income Only
But not all annuities are designed strictly for income . “ While I definitely believe retirees need more income that is protected for life , I ’ m not convinced people need more income that is fixed ,” says David Blanchett , the Lexington , Ky . -based head of retirement research at PGIM , the investment management group of Prudential .
Fixed annuities generate a specific , contractually guaranteed income for a designated time period . But an annuity with a “ market component ,” Blanchett says , has “ the potential to generate more income over a retiree ’ s life .” There is a greater degree of risk , but “ that could be fine ,” he says , if other assets are invested wisely .
Annuities with a market component include fixed-index annuities , which
To be sure , annuities have drawbacks . They may “ provide some comfort , [ but ] you surrender liquidity and market upside ,” says Matthew Wolniewicz , president of Chicago-based Income America .
link performance to a market index and thereby enable partial upside , in exchange for complete downside protection ( they cannot lose value ), and variable annuities , which invest assets in mutual-fund-like subaccounts with fluctuating values .
Variable annuities carry more risk , which is why one popular type is the registered index-linked annuity ( RILA ). These limit the downside possibilities while also capping the upside potential .
These products can be “ used as a protected growth strategy ,” says Corey Walther , president of Allianz Life Financial Services in Minneapolis . They “ can serve as an anchor to allow the rest of a portfolio to stay invested in equities for greater long-term growth potential ,” he adds .
Guaranteed Lifetime Withdrawal Benefits
Most variable annuities also come with an optional guaranteed lifetime withdrawal benefit , a rider that can be added on — for an extra fee — to provide a minimum payout regardless of market performance . “ Annuities do not have to be annuitized to generate guaranteed income ,” notes Glen Franklin , assistant vice president at Jackson National Life Distributors , a unit of the Franklin , Tenn . - based life insurance and annuity provider .
This is “ where confusion can arise ,” says Wade Pfau , Dallas-based author of the Retirement Planning Guidebook and cocreator of the Retirement Income Style Awareness planning tool . “ It does take some effort on the part of individuals to understand how the provisions work .”
Kailyn Paolucci , a wealth advisor at Bartlett Wealth Management in Cincinnati , strikes a similar note of caution . “ While the income may be guaranteed , there are other details that often get lost ,” she says , citing fees , commissions and early surrender charges , among other considerations .
Annuity Limits
To be sure , annuities have drawbacks . They may “ provide some comfort , [ but ] you surrender liquidity and market upside ,” says Matthew Wolniewicz , president of Chicago-based Income America .
Certainly no one should put all their investable assets into annuities . Keep “ sufficient savings in a discretionary spending and / or emergency fund to provide a buffer against the need to take excessive withdrawals ,” says Frank O ’ Connor , vice president of research at the Insured Retirement Institute in Washington , D . C .
Still , with interest rates up , annuity payouts have grown . “ In some cases , these rate increases have outpaced alternative options … such as bank CDs ,” says Scott Gaul , head of individual retirement at annuity provider Prudential in Newark , N . J .
46 | FINANCIAL ADVISOR MAGAZINE | JUNE 2023 WWW . FA-MAG . COM