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Wade Pfau Speaks Out on Retirement Product Some Advisors Love to Hate

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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.”

Client Suitability

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.

The Variable Annuity Fit

An effective risk-wrap strategy combines investment growth opportunities with lifetime spending protections, which is the domain of variable annuities offering lifetime income benefits, Pfau says.

Variable annuities with living benefits are designed to offer upside growth potential with secured lifetime spending even if markets perform poorly.

“Such tools also maintain liquidity for the underlying assets, as deferred annuity assets remain on the balance sheet and can be invested with their values shown on portfolio statements,” he explains. “There is commitment and back-loaded protection, but these strategies can also be reversed with remaining assets returned to those who decide they no longer want or need the lifetime spending protection.”

The secured retirement income guardrail through the variable annuity’s lifetime income benefit addresses the willingness to commit and the longevity-risk aversion dimensions that risk wrap investors want, says Pfau.

“With a nationally representative survey, we find that about 15% of the population between ages 50 to 80 have the characteristics that resonate best with considering tools such as deferred variable annuities,” he adds.

Evaluating Variable Annuities for Clients

The article provides clear explanations of variable annuities’ key features, including:

  • Guarantees’ growth during the deferral period
  • How guaranteed withdrawals are determined and how they can grow during the distribution period
  • Variable annuities’ death benefits
  • How insurers manage contract guarantees’ risk
  • A method to help consumers evaluate variable annuities with different downside protections and upside exposures

Pfau suggests retirement advisors initially consider a variable annuity’s income features instead of getting buried in the products’ technical details. “It is important to first focus on the amount of protected income provided by different annuities in the worst-case scenario when no upside is realized,” he says. “This requires combining the rollup-rate and payout rate provisions to see the spending power. This number will generally be lower for variable annuities.

“But then the next step is to analyze the potential offered for step-ups in income if markets do well. With reasonable step-up opportunities, those with the probability-based preferences may start to prefer variable annuities with higher potential payments than fixed annuities.”


Ed McCarthy is a freelance financial writer who holds the certified financial planner and retirement income certified professional designations.