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Ask the Expert: Positioning the guaranteed withdrawal benefit

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The question was: How do I position the advantage of a fixed indexed annuity (FIA) having a guaranteed withdrawal benefit versus a managed payout fund? My client tells me they guarantee an income stream; is this true?

The answer is: First, let’s be clear that what your client is referring to is not guaranteed, whereas the guaranteed withdrawal benefit with a FIA is guaranteed.

Your client is referring to what are generically called “managed payout funds” or “target distribution funds.” These funds are intended to provide steady income and are/will be marketed as alternatives to immediate annuities and probably as an alternative to annuities with guaranteed lifetime withdrawal benefits. There are several versions of these currently being offered, and as with any financial vehicle, they have their pros and cons as it regards suitability and proper use in overall retirement income planning.

“Managed payout funds” are actively managed mutual funds that target an income payout rate. Some return both principal and earnings over a set period of time (i.e., over 20 or 30 years), while others are intended to provide income primarily through earnings generated by the underlying investments. As with most mutual funds, many of the fund companies have several versions that differ by the investment and income management objective.

It is critically important for consumers to understand that these are target income payments, and while in some cases they are guaranteed for one year at a time, they are not guaranteed over the long-term.

As stated in many sales materials, these funds:

“…are not guaranteed to achieve their investment objectives, are subject to loss,…the dollar amount of a fund’s monthly cash distributions could go up or down substantially from one year to the next and over time. It is also possible for a fund to suffer substantial investment losses and simultaneously experience additional asset reductions as a result of its distributions to shareholders under its managed distribution policy…”

Now, I am not saying that these products may not be good or suitable for retirement income (in many cases they might be). I am simply pointing out that the income payment amounts are not guaranteed for the retiree’s lifetime. The question to ask the consumer who is considering this type of fund for income is: “To what extent is an absolute guarantee of at least a minimal amount of income is important to you?”

A FIA offering a guaranteed withdrawal benefit is an absolute guarantee to provide income via the withdrawal guarantee, even if the principal is depleted. Additionally, the amount of monthly income provided with a guaranteed withdrawal benefit will not decrease (other than for excess
withdrawals), but it might increase over time.

Arthur Pickering, CLU
Senior Vice President, Annuity Sales
Forethought Financial Group, Inc.
Indianapolis, IN
[email protected]


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