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Retirement Planning > Retirement Investing

Adding Living Benefits Continues to Boost Results

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Anyone planning for retirement wants to increase retirement income potential while decreasing income risk. An updated study by Ibbotson Associates finds that adding a variable annuity with a lifetime guaranteed minimum withdrawal benefit (GMWB), an optional rider at an additional cost, to a traditional retirement portfolio can increase retirement income potential while decreasing income risk.

This new update of Ibbotson’s 2007 research paper “Retirement Portfolio and Variable Annuity with Guaranteed Minimum Withdrawal Benefit (VA+GMWB)” takes into account several new assumptions. Both the original study and the update were sponsored by Nationwide Financial Services, Inc.

“After the recent economic downturn and the changing market environment, many advisors questioned whether the findings of the 2007 study would still hold true,” said Eric Henderson, senior vice president of Individual Investments for Nationwide Financial in a statement.

“We asked Ibbotson to investigate the results of its original paper with different assumptions about investment allocations, fees, and insurance products, and Ibbotson found that living benefits continue to be a valuable retirement income tool for advisors and their clients,” he explained.

Based on the feedback of advisors, the updated study takes into account several new assumptions that reflect the current state of the economy and the changing needs of clients:

More conservative investment allocations – Ibbotson found a VA+GMWB can help increase income potential and reduce income risk when using more conservative investment allocations that better represent the products available in the market.

The 2007 study was performed with a Moderate Aggressive investment allocation (80 percent equities/20 percent bonds) inside the VA+GMWB.

The new version of the study now highlights a Capital Appreciation investment allocation (70 percent equities/30 percent bonds) and a Balanced investment allocation (50 percent equities/50 percent bonds).

Varied fee assumptions – The updated study still assumes a 3 percent fee for the variable annuity portion and a 2 percent fee for the mutual funds, but Ibbotson also tested the impact of lower mutual fund fees. Assuming 1 percent for the mutual fund fees instead of 2 percent and keeping the variable annuity fee at 3 percent still showed a benefit to adding insurance products to a traditional investment portfolio.

Standalone Living Benefits -In addition, Ibbotson tested whether the findings held true when a standalone living benefit (SALB) was used in place of a VA+GMWB. The results confirmed that a SALB could help a client achieve more income potential and less income risk than traditional investment products alone.

SALB products give investors the opportunity to generate guaranteed retirement income by purchasing insurance around assets outside of an annuity. Nationwide launched two SALB products in 2009.

“Investors face several major risk factors when making investment decisions in retirement–financial market risk, inflation risk, income risk and longevity risk,” said Peng Chen, president of Ibbotson Associates in a statement. “Combining traditional investments with insurance products that guarantee income can help investors have a more comfortable retirement.”

The Ibbotson study is available online.

Online Workbook

Following the 2007 study by Ibbotson, “The Retirement Income and Income Risk Workbook” was created to help clients and their advisors evaluate whether a VA+GMWB strategy such as Nationwide’s Income Insight would complement their investment portfolio.

Advisors now have the opportunity to use an interactive online version of the workbook that simplifies the process and only asks them to answer eight or nine questions about their clients, according to Nationwide.

Its online workbook generates the client’s suggested retirement income portfolio, which could include an allocation to a VA+GMWB. If a VA+GMWB is recommended, the online workbook would provide the asset allocation within the product. The online version also provides a printout of the completed workbook for the advisor or client’s records.

To obtain a copy, advisors can contact a Nationwide wholesaler or sales center, call Nationwide’s Income Planning Desk at 1-877-245-0763, or send e-mail to [email protected].


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