Savings2Income Responds to Recent Article Discussing Benefits of Variable Annuities

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Savings2Income comments on advice for strategic retirement investment and Guaranteed Minimum Withdrawal Benefit variable annuities.

On January 17, 2013, Savings2Income responds to an article offering advice to those considering owning a variable annuity.

A recent article, published January1st, by David Blanchett for Bank Investment Consultant discusses the increased popularity of variable annuities in the current economic climate as retirees seek to secure guaranteed retirement income.

The article highlights one particular variable annuity rider, usually known as a Guaranteed Minimum Withdrawal Benefit (GMWB). “This rider has a variety of features that make it popular,” states the article. “It provides guaranteed lifetime income, it allows the annuitant to pass on his remaining contract account balance to a beneficiary at death, and it allows the guaranteed lifetime income payment to potentially increase if the markets perform well.”

However, the article warns that variable annuities of this kind are getting more and more complex – advisors and investors need to understand how they work and when it's best to use them. According to the article, the GMWB is designed to provide a guaranteed lifetime income stream, based on the “benefit base,” which is a set percentage of the annuitant’s invested assets, and 5% is a typical withdrawal rate for 65-year-olds. The article explains that this percentage (also known as the “lifetime distribution factor”) is calculated according to the age of the annuitant when he/she starts receiving benefits. (For joint annuitants, the lifetime distribution factor is determined by the age of the youngest of the pair.)

“The actual income received by the annuitant is determined by multiplying the distribution factor by the benefit base at its highest point,” the article continues. This means that the historical peak of the annuitant's portfolio performance will always determine the income received, regardless of its subsequent performance. Because the income is guaranteed, the annuitant will continue to receive lifetime income even if the value of the GMWB portfolio crashes completely, says the article.

However, the article concludes that assessing the utility of a GMWB annuity is a complex task, and “research on the potential benefits of GMWB annuities has been mixed.” The author advises “since the GMWB rider fees do not typically vary by equity allocation, an annuitant is generally best served investing in the most aggressive portfolio available.”

Jerry Golden of Savings2Income responds, “Having invented the first Living Benefit Guarantee in 1995, I agree with Mr. Blanchett that the designs have become increasing complex. While my original design was supposed to be an incidental benefit added to a variable annuity, these riders have often become the sole reason for considering a variable annuity.”

Golden has done the analysis on other designs both within and outside the annuity business, and found that some provide more attractive and transparent benefits. For example, a low cost no load variable annuity followed by a series of purchases of Guaranteed Income through Fixed Payout Annuities provides tax benefits, low fees, and a steady stream of dependable, spendable income.

“Also, there are non-annuity investment offerings that provide what I call a best efforts approach to managing this risk, that are less expensive, more transparent and more liquid than the variable annuity designs,” Golden said.

An innovative retirement planning method called Savings2Income (S2I) created by Jerry
Golden seeks to provide a clear path to retirement security for those saving for retirement, soon to retire, and recently retired. S2I incorporates Rollover IRA savings, personal retirement savings held outside an IRA or 401(k) plan and Social Security into an integrated solution.


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John Mulqueen
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