Life Health > Annuities > Fixed Annuities

An alternative to immediate annui-cide

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I cannot tell you what the stock market will do tomorrow. But I can tell you if you are age 50 today and put $100,000 into any number of fixed annuities offering guaranteed lifetime withdrawal benefits (GLWBs), you will receive an annual lifetime payout at age 70 of at least $23,000 regardless of how the stock market or interest rates perform. If you and your spouse are age 65 today, I can tell you that $100,000 will produce at least a $10,000 annual income, beginning at age 75, for as long as either of you live, by choosing any one of several fixed annuities with GLWBs.

Fixed annuities have always been able to predict the future through minimum guarantees — this is why they are fixed annuities and not securities — but the future was minimal. If at age 50 you placed $100,000 in an annuity with a 3 percent interest guarantee (which is a strong rate today), the balance would grow to $155,797 by age 65.

A cursory look at current life annuitization rates says that balance would generate a lifelong income of around $13,000 a year, but you would lose control of the asset. Several fixed annuities with GLWBs would guarantee $15,000 in lifetime income under this scenario and you still keep control of the asset.

Many planning articles talk about spending a safe rate of 4 percent to help ensure money lasts until you die. If you compare this with the 6 percent payout rate available at age 70 on many fixed annuity GLWBs, the 4 percent managed money safe rate seems a loser from the start. However, it is assumed that today’s 4 percent rate will increase at the inflation rate, preserving purchasing power. GLWB payouts do not generally increase unless the account balance increases. Even though at 3 percent inflation it takes 14 years to match the 6 percent payout, the GLWB income could eventually lose significant ground against the planned payouts.

The planning approach is positioned to provide more income than the GLWB approach if the underlying assets perform very well, although the GLWB income payout could also improve if the financial environment is favorable. Ask the question: do you prefer the guarantees and lower upside potential of a fixed annuity or the higher possible returns and greater risk of the stock market? If the goal is to provide income for life and control of the asset, annuity GLWBs are looking more and more as the better solution to taking out a miserly safe rate and crossing your fingers, or converting and losing assets to build an income stream.

Jack Marrion is president of Advantage Compendium Ltd. in St. Louis, Mo. Responses and questions can be sent to [email protected].

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