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Retirement Planning > Retirement Investing > Annuity Investing

The 10% free withdrawal conundrum

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The easy definition of the word “conundrum” is anything that puzzles you. describes conundrum as a riddle of which the answer is a pun or a play on words, and point out one of the most popular conundrums we all are familiar with: What’s black and white and read all over? The answer is a newspaper. Witty, huh?

Well, I have somewhat of a conundrum that seems to be inexplicably plaguing the annuity industry. What specific aspect of a deferred annuity contract seems so simple and basic, but ends up being so hard for many to understand? The answer would be the 10 percent free withdrawal rules. This is not witty conundrum at all, but is a true “head scratcher” in my opinion.

I am continually baffled by this “annuity conundrum” and I continue to get tons of calls from people that own or are thinking about owning an annuity, and have no clue how this basic contractual provision works and how it should (or should not) be used. At this point, I am assuming (i.e., hoping) that all agents understand how the 10 percent annual free withdrawal provision works with most deferred annuity contracts. However, judging from the inbound calls I get on a monthly basis, there is a huge need to make sure the client understands this basic liquidity provision as well.

I know this is very elementary for most agents, but covering the basics seems to be needed. The vast majority of deferred annuities have a contractual provision that allows some liquidity for the client. Most times, that annual liquidity allotment is 10 percent of the accumulation value total, not the income rider total. Now that this has been factually established, let’s clarify a few mistakes that I think the industry is making when it comes to the 10 percent free withdrawal issue.

 Stop using “10 percent free withdrawal” as a bullet point

I always laugh out loud when I hear a client regurgitate some annuity presentation they heard, and list the 10 percent withdrawal provision as a reason they are considering or have bought an annuity. What an absolute joke. To me, that’s like saying you bought a car because it has four tires. Of course it has four tires, and of course you can take out some of your own money!

Not only do I blame the selling agent on this, but the carriers and FMOs as well. If I get one more product promotional email from an FMO that trumpets the withdrawal feature, I’m going to scream. Don’t get me wrong, the 10 percent liquidity feature can come in handy if needed, but I see too many email blasts and product bullet-point lists that prominently display this basic withdrawal rule as a top reason to purchase a deferred annuity.

It’s important to fully explain to clients that when you take money out of any annuity, it lessens the accumulation value and any rider value proportionately or dollar-for-dollar. I am always shocked and surprised how many annuity owners mistakenly think that taking money out of their policy does not disrupt or subtract from the contractual guarantees. That’s either a reflection of the annuity buying public being misinformed, or the agent not fully covering that base. I’m placing blame primarily on the latter.

Liquidity should be an emergency strategy

If a person is deciding to buy a deferred annuity and liquidity is a possible issue in the very near future, then they need to leave some cash in a bank account and not put all of their money into the annuity. In my opinion, the 10 percent withdrawal provision should only be used and implemented in emergency situations or for unforeseen events. 

There’s no justification for putting all of someone’s money into a deferred annuity, and telling them to use the 10 percent provision if they need extra liquidity. That’s financial malpractice in my opinion, and this type of unsuitable transaction is uncalled for and unwarranted. The client certainly needs to know about and understand the 10 percent withdrawal rules, but they also need to be advised not to use it if at all possible if their goals are to maximize the contractual guarantees of the policy.

Getting your own money back

This is the one thing that shocks me every time I factually point it out to an unknowing annuity owner that thinks the 10 percent withdrawal provision is some type of contractual benefit. It’s not! It’s just getting your own money back. What’s the big deal about that? It’s your money!

It’s important that the agent fully explain all of the details of any provision an annuity contract entails. Don’t let the client only hear the high percentage numbers attached to riders, upfront bonuses, and withdrawal rules without detailed explanation.

Before all of the quant agent types start contacting me, I am very familiar with specific withdrawal strategies that are sometimes used with advanced annuity planning solutions. I implement those in very unique situations, and always make sure that the client fully understands the inner workings of the annuity contract and why the recommendation is being made. That is not what I am talking about with this commentary at all and the problems happening with the ongoing confusion concerning the 10 percent withdrawal rules.

The bottom line is that liquidity provisions with a deferred annuity should never be one of the primary or secondary reasons to buy an annuity product in my opinion. My hope is that those confused phone calls concerning this issue start decreasing soon, and people (and some agents) start realizing that this large 10 percent number is certainly not too good to be true.

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