There is a growing schism in annuityland right now. On one hand, academics and the popular press, when writing positively about annuities, are recommending fixed immediate annuities. On the other hand, in the retirement planning world, most advisors are recommending deferred variable annuities with guaranteed minimum withdrawal benefits, especially since many of these now guarantee lifetime income after a certain age (usually no later than age 65).
The most recent numbers from LIMRA International, Windsor, Conn., bear this out. For the third quarter of 2005, only 2.6% of the $53.8 billion gross sales in annuities were for immediate annuities, while 65% were for VAs, many with GMWB riders (exact utilization not reported).
What is causing this schism? As usual, it is education and awareness on both sides. The academics and popular press are still largely unfamiliar with GMWBs. And most financial advisors are equally unaware of immediate annuities.
This puts soon-to-be-retiring, inquisitive baby boomers in an uncomfortable spot.
They are going to read up on retirement, including immediate fixed annuities. Then they are going to talk about them to their advisor, whose response will be, “Well, I prefer GMWBs to immediate annuities,” with no balanced reason offered. Worse, some advisors may sell the boomer a GMWB when an immediate annuity may have been more appropriate.
Here is a quick three-step process advisors can use with confidence to recommend the right product for the guaranteed-income portion of the client’s portfolio. It also will educate and impress the client, thus helping the advisor to gain referrals.
Step 1: Do The Simple Numbers.
Start by comparing the two products in a worst-case scenario as in Table 1. This table compares a $100,000 investment in a 20-year period certain immediate annuity and a GMWB for a 65-year-old who is taking income. The 20-year period certain payout is the closest apples-to-apples comparison to a GMWB that, at a 5% withdrawal rate, guarantees 20 years of income should the contract owner live or die. Both sets of numbers are after all expenses (including additional fees for riders). (The numbers are easy to create; the immediate annuity information is available from a simple online search for an immediate annuity calculator, and the GMWB numbers are simple math at $5,000 per year.)
Note: The Table 1 scenario assumes a truly worst-case 0% market every year for 20 straight years. Don’t confuse this with a sideways market that ends up in the same place 20 years later but has had peaks and valleys in the interim.