Annuities as Part of a Larger Retirement Portfolio

For the 80 million Baby Boomers who are just now beginning to cross the retirement threshold, at a rate of 10,000 per day for the next 20 years, the concept of retirement planning has taken on a whole new meaning.  Under the “new normal” retirement planning includes delaying the retirement date, planning for work after retirement, or lowering standard-of-living expectations. Retirement savers have had to endure two steep market declines (2000 and 2008), essentially flat returns during the decade of 2000, and, now a stymied economy that has shattered their confidence.  No longer can anyone simply rely on the simple strategy of socking a part of their paycheck into a 401(k) and let it ride. Today’s retirement portfolio needs to be constructed in way that addresses all of the risks while keeping the door open for growth.

Annuities as a retirement savings vehicle have had their critics.  Often labeled as too inflexible, or too expensive, or too illiquid, annuities have emerged as a critical component of a larger, more balanced retirement portfolio.  When considered on their own, one might be able to make an argument as to their inflexibility or their expenses as being unsuitable for many investors. However, when considered in the context of a complete portfolio, they make much more sense than some of the alternatives.  Let’s explore the features of annuity in the context of a retirement portfolio:


Tax Deferred Growth

When saving for retirement, or any long term objective, minimizing taxes on earnings is essential in order to maximize growth. The tax deferral component of annuities makes them attractive for anyone in the higher tax brackets who can benefit from minimizing taxes.  As with qualified plans, taxes are paid on the earnings as they are withdrawn, and there are penalties for withdrawals made prior to age 59 ½. As part of a retirement portfolio, annuities should be considered when allowable contributions to qualified plans, such as 401(k)s, have been maximized as they do provide current tax savings that annuity contributions don’t.

Safety of Principal

Fixed annuities are considered to among the safest of all investment vehicles. With the principal backed by the assets of life insurance companies, the most stable of financial institutions, investors have the peace-of-mind assurance that a portion of their retirement portfolio will  be secure no matter the economic or market conditions. A properly balanced portfolio should always have a portion of assets allocated to investments that are free of market risk.  The amount of the allocation will depend largely on the risk tolerance and the growth objectives of the individual investor.

No Required Minimum Withdrawals

One of the problems with relying solely on a qualified plan for a retirement portfolio is that they require a minimum level of withdrawals to be taken at the age of 70 ½. With annuities, there is no such requirement, so they can be left intact, continuing to accumulate on a tax deferred basis much later into retirement.

No Impact on Social Security Taxation

Many retirees are finding that, in order to maintain their standard of living, they need to continue to work in retirement. The potential problem that creates is that a portion of their Social Security income may then become includable in their income tax calculations. A married couple in retirement can only earn $32,000 from all sources before taxes are also owed on Social Security income.  One of the advantages of annuities is that their income is not includable as part of the Social Security tax calculation.

Guaranteed Death Benefit

Millions of investors lost as much as 40% of their retirement plan account values in the last market crash.  For those who were brave enough to keep their money invested in the markets, they recouped their losses and more.  It’s an unfortunate fact, that many investors didn’t keep their money invested and have yet to fully recover their losses. Throughout that whole ordeal these investors and their families were suddenly very vulnerable in the event of a premature death of the investor.  The family would be left with only a fraction of what was accumulated, and, in many cases, a loss of principal.  Annuities provide a unique layer of protection with their guaranteed death benefit which pays out, at a minimum the original principal to the beneficiaries. With some annuities, such as an indexed annuity or a variable annuity with special riders, even the gains can be protected against loss and includable in the guaranteed death benefit.

Annuities Explained

Guaranteed Lifetime Income

Since the demise of defined benefit, or pension plans, investors have had to rely on their own ability to accumulate enough funds that would generate an income they couldn’t outlive. Most studies have sadly shown that as much as 60% of people reaching retirement age have not saved nearly enough money to last a lifetime, at least without some major downgrade in their lifestyle. The “new normal” today will see most people delaying their retirement or working well into it. This is, perhaps, the biggest reason why pre-retirees are adding annuities to their retirement portfolios, because, as they are coming to realize, annuities are the only investment vehicle that can guarantee a stream of income that cannot be outlived.  When combined with the income generated from other savings vehicles, annuity income can provide the added safety net and stability for a retirement portfolio that needs to include other growth or risk oriented investments.


Very few financial advisors would advise anyone to own an annuity unless it was in the context of a complete retirement strategy that included a well diversified, balanced portfolio.  When the unique attributes of an annuity – its tax deferral, its safety, its guarantees, and it flexibility – are combined with a larger portfolio, it can greatly enhance its stability, reduce risk exposure, and provide long term security.


Are Annuities Safer Than Mutual Funds

Over the years the debate over the relative safety of mutual funds versus variable annuities has come and gone with nothing in the way of any real consensus winner. They both came on the scene at roughly the same time, surged in popularity together during the raging stock markets of the 80’ and 90’s, and proliferated to the point of saturation well into the early 2000’s. All things being equal, they both offer investors the opportunity to participate in the markets with relative safety and equal potential for upside growth. In either case, investors can achieve a level of diversification within professionally managed portfolios that can reduce the risk of stock market investing. In that regard, can one actually be safer than another?  In a word, yes.

If, by “safer”, we are referring to the possibility of principal loss, both types of investments entail market risk. Both invest in portfolios of securities that can either appreciate or decline in value. But, if you consider a standard variable annuity contract, there is at least one safety feature that you won’t find in a mutual fund and that is the guaranteed death benefit.  The death benefit affords the variable annuity investor one layer of protection that the mutual fund doesn’t offer and that is the guaranteed return of the investor’s principal investment.  While some variable annuity critics may try to belittle that benefit as inconsequential, they might ask those mutual fund investors who were unfortunate enough to die during the worst of the market decline in 2008.  At the very least, variable annuity investors can assure their surviving families of greater financial security even in the face severe market declines.

It has only been in recent years that variable annuity providers have upped the ante for investment safety by adding rider options that go even further to protect the principal as well as the gains in the account value.  And, for the increasing number of people who are concerned with outliving their income sources, the riders will also guarantee their income from a variable annuity.  Practically speaking, it doesn’t get much safer than that. While they do come at a cost, these riders provide the ultimate peace-of-mind that one doesn’t usually find in investments that also allow for unlimited upside growth.

All Gain and No Pain

The guaranteed account value rider (GAV) enables variable annuity investors to enjoy the gains in their account values while riding out the market swings.  Essentially, the rider guarantees a minimum amount of growth of the principal amount regardless of market declines. And, if the account values do appreciate over time, the rider provides a “step-up” that enables the investor to reset the principal amount to the higher account value.


No Account Gain? No Problem

The guaranteed minimum income benefit (GMIB) addresses any concern an investor might have over the possibility of having to take a smaller income as a result of declining market values.  The rider ensures that, during the accumulation phase, the account values will achieve a minimum amount of growth. And, at the time of annuitization, the income payment will be based on the greater of the minimum accumulation amount, the actual account value, or the highest account value level at previous anniversary date.

No Account Balance? No Problem

The living withdrawal benefit (LWB) essentially turns a variable annuity into a bottomless pit of withdrawals regardless of whether or not there are funds left in the account. When the rider is exercised, the withdrawal rate is set based on a percentage of the account value which can be the actual value or a guaranteed account value based on a minimum growth, whichever is higher.  Even after withdrawals begin, the account value can be “stepped up” if, as a result of market growth, it increases above the base account value. This would result in an upward adjustment of the withdrawal amount based on the same percentage applied to the higher account value.



The addition of these variable annuity riders essentially shuts the door on the “safer” debate. It’s not even a fair fight. However, they don’t come without a cost.  To add one of these riders an additional fee in the range of .5% to 1.2% will be deducted annually from the account values.  This on top of the average annual fees of 1.5% to 2% for standard variable annuity contracts. So, for the absolute peace-of-mind that can be attained alongside the upside growth potential, an investor will pay as much 3% of account values each year.  With over 60% of Baby Boomers lying awake wondering if they will outlive their income, these types of guarantees may be priceless.

One important caveat: Guarantees are only as solid as the companies that back them. If you are guaranteed a minimum income for a lifetime that may last 30 years, it would be extremely important to make sure you are working with a company that will be around at least as long. Life insurance companies are considered to be the strongest and most stable of financial institutions, but, with so much at stake, why not work with the strongest? Companies that have earned the highest ratings (A+ or better from A.M. Best or AAA from Standard & Poor’s) are deemed to have the capability of weathering even the most treacherous economic storms. If you really want peace-of-mind, stick with quality.




Exploring Variable Annuity Riders

Over the years variable annuities have had a somewhat spotted history. During the high tax and bull market environment of the 1980’s they became the darlings of financial advisors and investors looking to capitalize on rising stock prices while reducing their taxes. As the proliferation of variable annuity products hit a peak in the 1990’s they came under close scrutiny for their high expenses and their suitability for some investors. In recent years, especially in the aftermath of the recent financial crisis, variable annuities are getting a fresh look as much for the renewed concerns about outliving retirement income as for the availability of new riders that have enhanced their standing as a solid investment vehicle. Here we explore the most important variable annuity riders.

Guaranteed Minimum Income Benefit (GMIB)

The GMIB arrived at a time when variable annuity investors began to feel the pinch of the wild market gyrations on their annuity income payments. While the advantage of variable annuity income stream is the potential for increased payment amounts during rising markets, investors may not have been prepared for the steep drops in market values that they saw in the 2000 decade. The GMIB was introduced to allay the fears of those kinds of market swings by providing a minimum income guarantee regardless of declining market values.

The income guarantee is typically based on the greater of the actual market value of the annuity contract at the time of annuitization, or a fixed rate of interest compounded annually over the accumulation period, or the highest market value of the contract during the accumulation phase. The GMIB provisions vary from one contract to the next, but most of them require that the annuity be in effect at least 10 years (or some specified period) before it can be exercised. They also require that the whole contract be annuitized versus only a partial annuitization. Not all variable annuity providers offer a GMIB, but those that do usually offer them on all of their different variable annuity contracts, except no-load contracts.

Living Withdrawal Benefit (LWB)

The LWB is another rider that investors can purchase if they are concerned with the impact of market declines on their future withdrawals. The LWB ensures that you will receive a minimum withdrawal – monthly, quarterly or annually- for life, even if your account balance falls to zero. The amount of income is typically based on a withdrawal percentage using a minimum compounded interest rate such as 6% or 7%. To determine the guaranteed withdrawal amount, the percentage is based on the higher of the actual account value or the amount the account value would have grown to using the minimum interest rate. Some contracts allow you to “step up” the account value to the highest value attained during the exercise period of the rider. In all cases, once the withdrawals begin, they are guaranteed to continue for life.

Guaranteed Minimum Withdrawal Benefit (GMWB)

The GMWB is similar to the LWB except that it doesn’t provide a lifetime guarantee of withdrawals. The GMWB does guarantee that you can never lose any of your principal and that you will receive a minimum withdrawal payment based on a percentage of your principal balance until you have used up all of your principal and accumulated interest. If the market performs well and you account value increases, even while you are receiving withdrawals, you may have the option of “stepping up” the principal payments to reflect the higher account value. This means that, if your initial payments were based on a $100,000 investment, and your account value grew to $150,000 over a 10 year period, you could increase your withdrawal payment based on a percent of the stepped up account value of $150,000. You would choose a GMWB over a LWB if you preferred that you receive all of your principal and interest within a specified period of time as opposed to over your lifetime. In this regard, the GMWB can generate much higher withdrawal payments.

Guaranteed Account Value (GAV)

The GAV rider guarantees your account value so that it doesn’t drop below the principal balance. It also enables you to lock in a minimum growth rate. In some cases, the GAV will also allow you to step up your account value to lock in market gains. All future withdrawals are then based on the stepped-up account value regardless of whether the market declines. In this regard, a variable annuity with a GAV acts very similar to an indexed annuity, but with greater upside potential.

Weigh the Costs and Benefits

These are very powerful riders, and on their face, they turn an ordinary variable annuity into an extraordinary investment vehicle. But, they do come at a cost. The fees for adding these riders range from .30% to 1.0% of the account value and are deducted annually. For anyone who experienced the market roller coaster of the 2000 decade, they may be well worth the cost. When comparing variable annuity products, it is important to compare the cost of these riders as well as their provisions. For example, each annuity provider will have their own provisions that establish when the riders can be exercised, or how often step-ups can occur, or the minimum holding period before withdrawals can begin. Each rider has specific provisions that should be fully explored and their costs weighed against the benefits they provide.

Things to Look for in Your Annuity Provider

In the aftermath of the financial crisis, annuities have seen a remarkable resurgence as people become more concerned with outliving their income. Over the last decade, the annuity marketplace has expanded significantly to accommodate the increased demand. The net result is that there are a lot more people searching for the right annuity from among a vast, and expanding universe of products. Access to information and rate comparisons online has certainly made the search somewhat easier, but, with the enormous number of choices available, it can still be a paralyzing experience. However, once you learn the things to look for in your annuity provider, your search can be made even easier.

Financial Strength and Integrity

There are literally hundreds of life insurance companies that offer annuities, but there are only a few dozen that have earned the highest ratings available from the independent financial ratings companies. Considering that your principal along with all of the guarantees that are offered in your annuity are backed by the financial strength and integrity of the issuing company, it only makes sense to go with the companies that are rated the best. And, the transparent world of the Web, all annuity providers recognize that they must offer the best rates and lowest expenses in order to compete. You are not likely to do any worse in terms of rates or expenses if you confine your search to those companies rated A+ or better by A.M. Best or AAA by Moody’s.

Superior Customer Support

One of the main criticisms leveled at annuity providers is the lack of good, responsive customer support. Some companies are very good at promotion and the sales process, but once they have you as an annuity customer, you are treated as a number. While that is not a frequent occurrence, it could happen to you if you’re not diligent in learning more about the level of customer support that is available. Ideally, you have a trusted and reliable financial professional who can help you navigate the customer service complex. Still, it is important to know that you have an 800 number that is well-staffed with friendly and responsive people knowledgable in annuities. In this day and age of instant online communications, it is probably best to work with a provider that is technologically equipped to handle online chat and email communications.

Interest Rate Mechanics

It’s one thing to know that your provider is crediting your annuity with a competitive interest rate, however, it is much more important to know how they go about setting the rates. Your initial rate is only credited for a specified period of time, depending on the type of contract. Once that rate expires, a new rate is set. Some annuity owners are shocked when, after their high initial rate expires, the new rate is suddenly lower than the market rates applied to CDs. Each annuity provider determines its own method for establishing the new interest rates. Sometimes it is based on a formula that incorporates a complex set of factors, or it can be based on some relationship to the prevailing market rates. In either case, it is important to know that there is a method and how it applies.

Because the long term performance of you annuity really depends on the ability of the annuity provider to maintain competitive interest rates, it would be important to know their minimum interest rate guarantee. In some respects it may be better to forego a high initial interest rate if the provider promises a higher minimum rate guarantee.

Client Centric

Most annuity providers are simply product manufacturers that are equipped with a distribution channel to deliver its annuity products. While annuity providers are required by law to ensure that match their customers with most suitable annuity product, some providers do a much more thorough job of helping their customers better understand their needs and educating them on the merits of the various annuity choices. Providers that take the time to ask questions about your current situation, your tax circumstances, your goals, and your investment allocation are obviously in the best position to provide meaningful guidance. If you find yourself asking more questions than your annuity provider, it may be time to find another provider.

Additionally, the more client-centric providers will be much more thorough in providing you with information about expenses, their interest rate mechanics and other items that usually buried in the fine print of the contract. Providers that are truly looking out for your interest don’t hold anything back. Although it is your responsibility to study the contract, some providers feel a sense of obligation to make sure you understand all of its intricacies. If you find yourself having to drag a lot of this information out of your provider, move on to the next one.


Of course, you want to make sure that you end up with a quality product that will perform well, and there are many aspects about the product itself which need to be explored and compared. Generally, if an annuity provider passes this test on all of the things to look for, you can be assured that your annuity product will be of high quality as well.

Finding the Best Annuity Rates Online

It seems almost inconceivable that, not very long ago, we managed to get through life without the Internet. One thing for certain, when we were left to our own devices to shop, compare and investigate products, we were not as efficient, nor were we as well informed as we are now in the Web-wired world. Financial products are especially bewildering products to shop for as much for their complexity as for the vastness of the financial universe. And, arguably, there is no more complex financial instrument with as vast a selection than an annuity. Without the Internet, finding the best annuity rates was as difficult as finding a needle in a haystack. Now, finding the best annuity rates online can be done in just a few clicks of the mouse.

Although the Internet has shortened the distance between consumers and the best selection of annuities, it is important not to have any illusion about the difficulties that remain even with the online tools that are available. It doesn’t change the fact that annuities are still complex vehicles, and that there is a vast selection from which to choose the right one for you. It is still vital that, before you try to narrow down your choices, you do your homework in order to understand how to recognize when you have found the best annuity rate for your circumstance.

Know Your Annuity

The most essential knowledge you can have going into a search for annuity rates is just what type of annuity you need for your specific financial objectives. Within the universe of annuities that are many apples and oranges and other varieties that perform very differently. It is critical that you first have a clear understanding of your particular needs and the objectives you want to achieve.

Immediate Income Need:

Annuities have been used throughout time for providing a stream of income that is guaranteed for life or for some specified period of time. The current nomenclature for these types of annuities is “immediate annuities” based on the fact that, once a deposit has been made with a life insurance company, the income can begin immediately. The amount of income received is determined by calculating a payout amount which is derived from the length of the payout period, the total amount of the annuity deposit, and an interest rate that is fixed for the term of the annuity.

The key factor in the equation is the interest rate which will vary from one annuity provider to the next. Generally, when searching for immediate annuity rates, you won’t see the actual interest rate; rather, you will only see the payout amount that the interest rate will generate. For comparisons sake then, the higher the payout amount, the higher the interest rate that is being applied.

Accumulation for Future Income Need:

If your need for income can be deferred into the future, you can still use an annuity to accumulate the capital you will ultimately use for an immediate annuity. A deferred annuity enables you to accumulate funds on a tax-deferred basis which will allow them to grow faster than if they accumulated within a taxable savings vehicle. The additional tax advantage of using a deferred annuity is that, when you are ready to convert your accumulated funds to an immediate annuity, there is no tax consequence – your funds will continue to accumulate tax deferred until they are received as income.

As with any accumulation vehicle, the rate of return, or interest rate, is a critical factor for ensuring that your funds are working as hard as possible within your risk constraints. Obviously, the higher the credited interest rate is, the harder your funds will work. When comparing deferred annuity interest rates you will be comparing the actual rate of interest which, again, will vary from one provider to the next.

There More to the Interest Rate Story

If it were as simple as comparing the stated interest rates side-by-side, this article could end right here. Unfortunately, the stated interest rate is only a small part of the story. Beneath the surface, you will find several different ways that interest rates are applied. Some are guaranteed for a certain number of years. Some are renewable annually. Some offer a high “teaser rate” which can drop precipitously after a year to a lower, non-competitive rate. Sometimes there is a bonus rate that is applied based on the size of your deposit. When an interest rate guarantee expires, a new rate is credited, which can be higher or lower than your initial rate. Most annuity contracts include a minimum rate guarantee which prevents the rate from dropping below a specified floor. For comparison purposes, it is important to consider all of the factors to ensure the best long term performance of your annuity.

The other key consideration is the flexibility of the surrender provision which determines how much of your funds are available for withdrawal without penalty. In some cases, an annuity that credits a highly competitive rate of interest may have a much more restrictive surrender provision – either higher surrender penalties or a longer surrender period, or both. And, when comparing high interest rate annuities, be sure to compare annuity expenses, as annuity providers may sometimes try to offset the cost of a high rate of interest with higher expenses.

Quality is as Important as Quantity

Comparing interest rates and rate guarantees, while important, should be done only after you have narrowed your selection of annuity providers based on their financial strength and quality. By focusing only the highest rated annuity providers, you will quickly narrow your choices from hundreds down to a few dozen. The availability of rate comparisons online has made the entire field of annuity providers extremely competitive, so you are likely to find the best annuity rates even among the more highly rated companies.

The importance of choosing quality in an annuity cannot be understated as all of the guarantees of an annuity are only as sound as the financial strength and integrity of the company that backs them. Although annuities are considered to be among the safest of all savings vehicles, there is little reason to chase after a high interest rate from a lower rated company when there are so many competitive rates being offered by the top companies. It is strongly recommended that you confine your search to those companies rated A+ or better by A.M. Best or AAA by Standard & Poor’s.


Armed with the knowledge of which annuity fits your needs, and how to dissect the interest rates and rate guarantees, it is just a matter of logging on, and narrowing your choices. By no means should you expect the task of finding the best annuity rates online to be without challenges. The annuity rate search sites do a great job of facilitating your search, and providing you with essential information for comparison purposes. At some point, it is advisable to seek the guidance of a trusted financial professional who can answer all of your questions and ensure that your ultimate choice best suits your needs.