Your Money ò Financially Speaking
Annuities with guaranteed benefits are complex and costly
Buying Your Own Pension By Jane Bryant Quinn
I know what you want in a re- tirement investment: terrific stock market gains without
any risk of loss, and a steady, reliable income when you retire.
No such dreamy product exists,
but there are contenders—
specifically, variable annuities with what
are called “living benefits.” Our
age group is the target market for
these complex, high-cost investments. How do they work, and are
they worth it?
Living-benefit variable annuities are sold by stockbrokers, insurance agents and financial plan-ners. Typically, they’re a package
deal, with an investment part and
a guaranteed-income part.
The investment part. You put
up a lump sum, generally $50,000
or more of your retirement savings. It’s invested in various stock-and-bond “subaccounts” (
annui-ty-speak for mutual funds). These
accounts rise and fall with the
market, minus costs. You’re hoping, of course, for excellent long-term gains. At retirement, you can make withdrawals from this account in any amount you
want—a lump sum or periodic payments—just
as you would from a mutual fund investment.
The guaranteed-income part. This portion
of the annuity is your safety net. The insurance
company promises to credit your original investment with a fixed increase every year. Commonly, a gain of 5 percent is entered on the books,
plus a higher dollar amount if your investment
accounts do well. If your investments do poorly,
you’re still OK. The minimum guaranteed increase always applies. However, this isn’t a value
that you can take in a lump sum. Instead, the contract fixes a withdrawal rate that will last for life.
For example, take a $100,000 annuity with a 5
percent income guarantee. I’ll assume the worst—
the stock market falls and your investments are
now worth only $70,000. Your guaranteed-
income account, however, has still been cred-
ited with 5 percent compounded annually on
can always fall back on your minimum in-
come guarantee. Since the 2008 financial
crisis, however, insurers have limited the
percentage you can invest in stocks. You
have to hold more bonds, whose returns
aren’t worth the high fees you pay.
the original $100,000. It’s worth about
$163,000 if you bought at age 55 and
held it for 10 years. At 65, you can turn it
into $8,150 a year for life. Like all annuities, any gains accumulate tax-deferred.
You pay taxes at ordinary income rates
when you take the money out. If you
die, any money left in these types of annuities goes to your heirs, after taxes.
This is a barest-of-bones description of
living-benefit annuities. Stiff penalties
apply to early withdrawals, and different products
work in different ways. If you’re thinking of buying, you’ll need to do a lot more research. Here, I
want only to give you a few things to think about.
For new purchasers. Annual expenses might
exceed 3. 5 percent per year (more, if you include
a spouse), reports Kevin Loffredi, a vice president of Morningstar. Smart buyers aim for high
long-term gains by loading up their investment
accounts with stocks. If you guessed wrong, you
Jane Bryant Quinn, a personal finance expert,
wrote Making the Most of Your Money NOW.
See more columns at aarp.org/janebryantquinn.