The Right Tool for the Job


The Right Tool for the Job

I’m not the handiest person around, so it’s no surprise I don’t enjoy fixing things around the house. When I do tackle a project however, the experience is completely different when I have the right tool instead of using something that just gets the job done. The right size socket as opposed to an adjustable wrench, for example.

When it comes to your clients, helping them select the best options on a fixed indexed annuity (FIA) can make it the right tool for retirement income.

We all know that over a longer time horizon you will achieve better returns in the stock market, which makes variable annuities (VAs) with subaccounts attractive to many clients. During the accumulation phase of building up your portfolio, VAs are an attractive piece of the puzzle. However, coming down the stretch or at the beginning of the withdrawal period, there are several things that work against the variable model and favor a fixed indexed option.   

First, we all know that an ill-timed negative year can have a major impact on the value of the account. An FIA takes the negative year off the table. Are you giving up the potential for a larger gain? Yes, but if your client no longer has the time horizon to weather a double-digit negative year, it’s a small price to pay. If you’re saying, “That’s why we have a roll-up and a guaranteed lifetime withdrawal benefit,” I agree.   

Fees

The fees in the VA are going to be higher than the FIA. The rider fee may be similar, but when you factor in mortality and expense fees, as well as administration and investment fees, your VA could be charging you 3 percent, 3.5 percent or even more. An FIA will limit your fees to somewhere around 1 percent annually. In distribution, fees become even more critical to your portfolio. If you’re taking a 5 percent lifetime distribution and being charged 3 percent per year, are you going to have greater than 8 percent annual returns? If you’re using the income rider, does it allow for a portfolio that can generate that type of return, or does it give you limited investment options associated with the rider? I think you would have to agree that your VA is no longer an accumulation vehicle.  

Sequence of Returns

Just as important as the fees is the sequence of returns. If you’re arguing that you are using the VA to maintain an account value or grow the asset during distribution, a double-digit negative year can make than prospect almost impossible. Obviously, a repeat of 2008 would be devastating to any allocation, but even during the early years of distribution, a 15 percent decrease would be difficult to overcome. Add in the fees, and what would it take to see an increase in income or maintain your account value?

Fixed Indexed Advantages

Now that we are looking for an annuity that works as a distribution tool, why is an FIA a better option?  FIA offer your clients:

  • Higher rollup rates than you will find in VAs, which allow for greater guaranteed income potential
  • Higher distribution rates, which allow for higher guaranteed payments in retirement
  • Increasing payout options that aren’t tied to the account value, eclipsing the income value
  • Fees only associated with the benefit of having a guaranteed income that you cannot outlive
  • No negative performance impacts to the account 

 

The Bottom Line: An FIA can be the right tool for the income portion of your client’s annuity portfolio. The right product and rider can be an efficient income generator to meet their income needs for a lifetime.