What You Need to Know
- Fans tout variable annuities' flexible benefits, while critics cite the products’ complexity and high fees as anti-consumer deal-killers.
- Pfau says variable annuities with living benefits may be a good fit for investors seeking both investment growth and a structured income stream.
- When comparing VAs, advisors should first look at how much income they provide in a worst-case market scenario, according to the researcher.
Variable annuities are big business. According to LIMRA, total variable annuity sales were $32.3 billion in the fourth quarter of 2021, an increase of 17% from the prior year. For the full year 2021, total sales were $125.6 billion, 27% higher than the prior year.
But if you want to start a debate among financial advisors, bring up variable annuities’ possible role in clients’ retirement income plans. Variable annuity fans will tout their flexible benefits as the Swiss Army knife of financial tools, while critics will cite the products’ complexity and high fees as anti-consumer deal-killers.
There is a more balanced perspective on variable annuities with living benefits, though. In a Journal of Retirement Summer 2022 article, “The Role and Inner Workings of Variable Annuities with Guaranteed Lifetime Withdrawal Benefits in Retirement,” Wade Pfau, Ph.D., CFA, RICP, discusses the pros and cons of using variable annuities with guaranteed lifetime withdrawal benefits (GWLBs) for retirement income.
Pfau is professor of retirement income at the American College of Financial Services and founder of the Retirement Researcher think tank, and his article avoids the biases often found in variable annuity discussions. The article draws from the material in his book “Safety-First Retirement Planning: An Integrated Approach for a Worry-Free Retirement.”
The suitability of variable annuities for a particular client is a key consideration from both the regulatory compliance and product-benefit perspectives. Pfau and Alex Murguia, Ph.D. and CEO of Retirement Researchers, have developed a characteristic-based quadrant of investors’ preferred retirement income styles.
Variable annuities with living benefits “generally fit best with investors who display the characteristics associated with the ‘risk wrap’ retirement income style,” says Pfau.
These investors want to participate in the markets and also want to commit to a solution that provides a structured income stream, Pfau explains. They seek growth and some liquidity; they also have longevity-risk aversion and are comfortable with committing to strategies.
“With such proclivities, these individuals may want a guardrail that limits downside risk exposure and not be completely reliant on the risk premium with an unprotected investment portfolio,” he adds.