The New Annuity

As life expectancies continue to increase at a rapid rate, the fear of outliving one’s money has become the No. 1 retirement concern.* The baby boomer revolution is here! Seventy-five million baby boomers will be retiring over the next 10 years which represents over 20 trillion dollars that will shift from the wealth accumulation phase to the wealth distribution phase of retirement planning.

When saving and investing for retirement, asset allocation is critical. How much you have invested in stocks and bonds and how those assets grow will affect the accumulation phase of your retirement portfolio. When it comes to distribution planning, the key strategy shifts to product allocation. Product allocation involves owning certain investment products to achieve specific retirement goals like income and cash flow planning. By utilizing the right product allocation strategy, you can mitigate the three big retirement risks: longevity (risk of outliving assets), inflation (risk that one’s standard of living declines because of rising costs) and sequence of returns (risk of a retiree withdrawing money from a nest egg that has ‘negative returns’ during the early years of retirement).

One of the products that has reinvented itself over the last decade to address product allocation concerns has been the variable annuity. The variable annuity was once attractive for the tax-deferred growth and death benefits it offered. When income tax rates and capital gains rates changed, the tax deferred growth became less of an advantage. The death benefit has always been a key component of an annuity; the only problem is that if you plan on using your money when you are alive, what good is a death benefit? The variable annuities used by financial advisors today are being utilized for their living benefits.

Living benefits come in several forms—guaranteed minimum accumulation benefit (GMAB), guaranteed minimum withdrawal benefit (GMWB) and guaranteed minimum income benefit (GMIB). Although these benefits can provide a steady stream of income that is guaranteed by the insurance company, they can often be confusing and hard for the average investor to understand. When considering the use of variable annuities for your retirement portfolio, you should get the help of a professional financial advisor. The advisor should work with a reputable firm that offers a variety of investment products and not just annuities. Product allocation includes investing in different products—stocks, bonds, mutual funds and professionally managed accounts.

One of the biggest concerns with the variable annuity contracts issued today is the cost. So the question becomes ‘are these additional costs worth the additional living benefits?’ The example I like to use goes something like this. Living in Pittsburgh, there is an added cost to own a four-wheel drive vehicle. However, there is peace of mind in having a four-wheel drive vehicle when you wake up on a snowy morning in December. Some people would rather have something and not need it rather than need something and not have it.

If you own an annuity or are considering purchasing an annuity for your retirement, you need to do a thorough review of the pros and cons and the features and benefits that variable annuities offer. Our annuity review identifies the following components:

• Insurance Company—Your contract is only as strong as the insurance company that issues it. You need to deal with a top-notch, top-rated insurance company that continuously upgrades and updates their contracts.

• Investment Options—With over 15,000 mutual funds available today, your annuity contract should have a wide variety of great choices of where to invest your money.

• Living and Death Benefits—Living benefits come in a lot of shapes, sizes and colors. Depending on your specific income needs, there may be some contracts that are better than others. Make sure you have the right contract for your retirement.

• Titling—Annuities are usually not the best estate planning vehicle. You need to make sure your contract is titled properly and coincides with your estate plan. Our annuity review looks at the owner, annuitant and beneficiaries.

• Fees and Expenses—How much are you paying and what are your total expenses? We will determine if you are paying too much and if you are paying for features that you don’t need. Our annuity review takes an in-depth look at all of the critical components of a variable annuity contract and will determine if an annuity is right for you, in addition to the best way to personalize your investment.

If you are interested in learning more about Hefren-Tillotson’s annuity review or would like additional information on variable annuities, call my office at 412-258-1101.

*Information contained herein:
Are You a Stock or a Bond, by York University Professor Moshe A. Milevsky.

Kevin C. Krul is First Vice President and Financial Advisor with Hefren-Tillotson. He may be reached at 412-258-1101 or kkrul@hefren.com. The Wexford office of Hefren-Tillotson is located at 4001 Stonewood Drive.