A tough stretch for variable annuities

In a case like this, says Dudum, it can make sense to invest $500,000 in a VA with a 5 percent guaranteed lifetime withdrawal benefit (GLWB). The contract will provide $25,000 per year or roughly $2,000 per month to cover the client’s income shortfall. That arrangement allows Dudum to reassure the client that regardless of what happens in the investment markets, the client will receive $5,000 per month income for life.

Dudum uses VAs for qualified money and prefers that clients keep non-qualified funds in more liquid accounts. His reason: Qualified money gets taxed upon withdrawal, which reduces the likelihood of an investor withdrawing a lump sum. GLWB-based withdrawals work well within that discipline.

Caveats

VAs aren’t a panacea, he cautions, because the fees and surrender charges can be high. In cases where the client doesn’t need a pension-like income, Dudum uses a traditional managed account approach. 

He also cites changes in the VA-marketplace as a consideration because GLB terms have become less generous. But there’s a benefit from that trend, he notes. Because rates have been low for a while, GLB terms appear to be stabilizing. Also, the reduced number of issuers in the market makes it easier to evaluate VAs, he maintains: “The positive (side to that) is that there aren’t that many carriers to look at so it makes our job a little easier to find the best options.”