As advisors grapple with ways to make sure their clients have income in retirement, one financial advisor is calling living benefits in variable annuities a “false solution.”
Sales of living benefits are gaining momentum. In its 2007 Fact Book, NAVA, Reston, Va., estimates that 68% of variable annuities sold are purchased with living benefits. Sources in the industry speculate that the number is even higher, coming in at over 70%.
Chris Cordaro, a wealth manager with RegentAtlantic Capital, Chatham, N.J., a fee-only wealth management firm, called living benefits a “step backward.” Cordaro made the remarks during a panel discussion on retirement sponsored by Jefferson National Life Insurance Company, Louisville, Ky.
The reason, he explained, is that the guarantees are so costly that “it really is guaranteeing that insurance companies will keep your money for a very long time.
“It actually put us a step backward in the retirement income challenge instead of moving us ahead,” Cordaro said.
Costs for variable annuities run in the 3% range and even if you earn an 8% rate of return on equities over the long term, the result is a “very low rate of return,” he said. “I just think that they are horrible.”
Payout funds that the mutual fund industry is now offering are “equally offensive to me,” he continued.
The Investment Company Institute, the mutual fund trade group based in Washington, currently does not track sales of payout funds, according to an ICI spokesperson.
“Why are they becoming popular?” Cordaro asked. “Because living benefits are so popular. If you read the marketing material, they really sound like living benefits.”
The reason, he explained, is that these products “create the perception that they are solving the problem. But we are not solving the problem.”
What can help solve the “fundamental issue” of having income in retirement, Cordaro said, are products that pool longevity risks. For instance, he cited annuities with a long deferred starting date that would commence at around age 85. Premiums for such products are much lower and you are actually insuring for the problem of living too long, he added.
Another product that Cordaro said could provide income in retirement years is the tontine because of the way that it pools risks. It shifts the investment and longevity risk to the insurance company and has the advantage that it will bear the investment risk as well as the longevity risk along with the rest of the pool.
“There is no real secret sauce here,” said Cordaro. “As planners, we need to manage risks as well as assets.”