As the stock market tanked, rebounded sharply, and then settled into a pattern of volatility, the vulnerability of Americans’ retirement savings has been laid bare. Many investors who dumped stocks during the March market meltdown are still sitting on the sidelines with diminished portfolios.
Low yields, meanwhile, make it impossible to rely on a sufficient income stream from traditional fixed-income sources. And hardships stemming from the coronavirus pandemic have forced many to dip into long-term savings, reducing the chance of retiring on time, or at all.
For nervous investors looking to tuck some guarantees into their portfolios against this backdrop of uncertainty—whether it be downside protection, a fixed rate of return with upside potential, or a steady income stream for life—more independent financial advisors (who don’t get paid to sell products) are recommending a product they once eschewed: annuities.
“When you look at the probability of a financial plan’s success with and without an annuity, it can be like night and day,” says Shannon Stone, an advisor at DHR Investment Counsel in Oakland, Calif. “I’ve always had a negative view of annuities. People would come to us with annuities they were sold but didn’t need. We are new at recommending them.”
Indeed, annuities have long had a suspect reputation. They are complicated at a glance, and even more complicated when you look under the hood at the hundreds of iterations on the basic fixed and variable annuity structures. Fees can be high and either layered or hidden. And they have a reputation of being oversold by commission-motivated insurance agents.
What’s more, many annuities recently slashed lifetime income guarantees and lowered caps on investment returns in a scramble to reprice products after the Federal Reserve cut interest rates to near zero in March, making them much less appealing for retirement savers and handing critics of these insurance-investment hybrids fresh fodder to caution investors to steer clear.
BEST ANNUITIES: GUARANTEED INCOME, NO FRILLS
Fixed-income annuities are tools that turn a lump sum into a lifelong income stream, either immediately or sometime later.
Single-life payouts for women are generally lower because their life expectancies are longer.
Immediate-Income Annuities: Called SPIAs, these contracts turn guaranteed income on right away. Assume a $200,000 investment at age 70. Payments for “joint life” assume a man is 70 and his spouse is 65. 10-Year Certain: If an investor dies within 10 years of starting income, payouts go to heirs for what’s left of the 10-year period.
Cash Refund: When an investor dies, any remaining principal is paid to heirs in a lump sum.
Note: AM Best Rating. Single life pays for one person’s lifetime; joint life pays for both spouses’ lifetimes.
Rates and guarantees are down over last year in most categories due to the recent repricing, which has caused sales to skid after 2019 logged the best annual annuity sales in 11 years at $242 billion, according to Limra’s Secure Retirement Institute, an insurance trade group that collects annuity data. Total sales in this year’s first quarter were down 8% over the same period last year, even as a new retirement law was enacted late last year, opening the door to more sales of annuity products in workplace retirement-savings plans.
There are, however, many good annuities that can help shore up a retirement plan. For a look at the best of what the industry is offering, Barron’s compiled 100 competitive annuities based on assumptions such as age, gender, size of investment, and time horizon. Results would change by tweaking any assumption, and contract quotes are updated frequently, especially in times of rapidly changing market conditions—so investors should screen for the best options according to their personal profiles and goals.
“You have to be sure to find the annuity that’s the best tool for the kind of financial house you’re trying to build or protect,” says Russ Weiss, chief financial planning officer at Marshall Financial Group, a fee-only advisory in Doylestown, Pa.
BEST ANNUITIES: DEFERRED-INCOME ANNUITIES
A contract is purchased now, but pays out later.
Personal Pension: Assumes a 60-year-old invests $200,000 and turns income on at age 70. Any remaining principal at death is paid to heirs. Joint life assumes a married man and woman are ages 60 and 55.
Personal Pension as Longevity Insurance: Assumes a 60-year-old invests $200,000 and turns income on at age 80. Any remaining principal at death is paid to heirs. Joint life assumes a man is 60 and his spouse is 55.
Personal Pension Within IRA: Up to $135,000 of IRA assets can buy an annuity and be exempt from required minimum distributions. Assumes a 70-year-old puts in $135,000 and takes income at 84; what’s left at death goes to heirs. Joint life assumes a man and wife are age 70 and 65.
There is one product that has bucked the recent bad-news trend: registered indexed-linked annuities. RILAs, the industry’s newest innovation, have exploded in popularity in the past couple of years, thanks to a compelling trade-off that they offer to investors who are risk-averse but need growth—some protection on the downside in exchange for a cap on a linked stock index’s performance.
Sales on RILAs rose 38%, to $4.9 billion, in the first quarter this year. “It’s our most commercially successful product in the over 100-year history of Lincoln by any measure,” says Will Fuller, executive vice president of Lincoln Financial Group, which launched its first in 2018 and has since issued a flurry of variations.
Industrywide sales of RILAs slowed when the pandemic escalated in the U.S. in March, but Limra forecasts that these annuities will be the only type to have an increase in sales this year over 2019.
The most popular RILAs are referred to as “buffer annuities” because they absorb some loss—typically the first 10%, 15%, or 20%—and the saver eats the rest. With a 10% buffer, if the stock index it is linked to has an annual return of negative 9%, the annuity holder is protected from any loss. If it is down 12%, the loss would be 2%.
Upside caps will be lower on contracts with more protection. For example, Symetra Life offers a 10% buffer with a 16% cap on the S&P 500 index’s performance in its Symetra Trek annuity; Protective Life’s Market Defender II annuity will buffer 15% and sets a 13.5% cap on the S&P 500’s upside.
BEST ANNUITIES: GUARANTEED INCOME WITH SOME LIQUIDITY AND GROWTH POTENTIAL
Fixed-Indexed Annuity Income Guarantees: These are riders with a seven-year surrender-charge period purchased on S&P 500-linked fixed-indexed annuity contracts. Assume a $200,000 investment by a 60-year-old. Payout begins at age 70. Joint life assumes spouses are age 60. Best Guaranteed Minimum Annual Income: The minimum income is paid for life regardless of the value of the underlying investments.
Best Potential Avg. Income: Based on probability analysis of 10,000 S&P 500 market simulations, some contracts are likely to pay more over time, even if payouts start lower.
Variable-Annuity Income Guarantees: These riders are sold as add-ons to variable annuities. Assume a $200,000 investment by a 60-year-old. Payout begins at age 70 and is the same for a man or a woman. Best Minimum Guaranteed Annual Income: There is a potential for higher payouts depending on the performance of underlying investments.
Best Potential Average Income: Based on probability analysis of 10,000 market simulations assuming 60% stocks and 40% bonds, contracts can pay more than the guarantee depending on investment performance.
Now that RILAs have a toehold in the market, some insurers are launching variations to suit investor preferences in the current market conditions. For example, Equitable recently launched a buffer contract that triggers a specific rate of return simply if an index has a flat or positive return. Its S&P 500–linked contract offers a 10% buffer and an 11% return as long as the return isn’t negative. A 0%, 5%, or 30% return on the index would all mean you get an 11% gain.
RILAs are the only type of annuity whose terms have sweetened lately—for example, in 2019, the cap on Symetra’s 10% S&P 500 buffer was 12.5% versus 16% now.
Caps are typically reset every year, but some contracts lock them in for several years. It shouldn’t be lost on investors that caps are higher when the likelihood of the market delivering a high return is low.
Trading some upside for downside protection isn’t new—that’s the premise of fixed-indexed annuities, the industry’s hot product before RILAs picked up broad investor interest two years ago. But caps are much lower on fixed-indexed annuities than RILAs—about 4%, down from about 5% last year—because they are dependent largely on bond yields for what they can pay, and they guarantee 100% downside protection, while RILA holders share risk with the insurer.
“This doesn’t mean one product is good and one is bad; it’s all about your personal situation and how you want to turn the dials on annuities to get what you want,” says Tamiko Toland, head of annuity research at Cannex, an annuity data and research firm. “When you get an annuity, you’re getting a guarantee, and you have to pay for the cost of that guarantee.”
BEST ANNUITIES: DOWNSIDE PROTECTION WITH STOCK-LIKE RETURNS
Registered Indexed-Linked Annuities (RILAs): These annuities provide some loss protection and returns tied to an index on the upside, with limits set by caps or participation rates. Assume these contracts are tied to the S&P 500. Buffer-Style: Protects against a certain percentage loss; investors are exposed to any losses lower than that. Assumes S&P 500-linked products.
Structured Variations: Promises downside protection and upside in tailored ways.
As for annuities used for income guarantees, payouts have come down sharply as they have become riskier and costlier for insurers to provide amid low interest rates and higher market volatility.
Consider the terms on the most basic type of income annuity, the single-premium immediate annuity, or SPIA, which turns a lump sum into an immediate stream of guaranteed annual income for life. Last year, the top-paying contract for a 70-year-old investing $200,000 and choosing the 10-year certain option, meaning the contract pays for 10 years even if the investor dies within the period, was $15,133 for a man and $13,813 for a woman. This year’s most competitive recent offer is $13,559 for a man and $12,780 for a woman, both from CUNA Mutual. Payouts are lower for women because they factor in life expectancies, and women live longer on average than men.
Sales of SPIAs in the first quarter took the second-biggest hit of all annuity types—down 32% over past year’s first quarter, according to Limra. Sales of plain fixed-deferred annuities, which work much like a certificate of deposit, were down 35%.
Income guarantees can also be paid out by adding riders on fixed-indexed annuities and variable annuities. These have underlying investments that can boost income above the guarantees when performance is strong—but, conversely, on some variable-annuity contracts, income can drop to a minimum guarantee that is significantly lower than the initial payout. This can happen if the contract’s underlying investments perform poorly.
BEST ANNUITIES: TAX-DEFERRED SAVINGS
Traditional Variable Annuities: These annuities are used for accumulating assets on a tax-deferred basis using a menu of underlying investments, much like a 401(k). There is a 10% penalty for withdrawing assets prior to age 59 1/2. These fees assume a $200,000 investment.
Peace of Mind
Like any insurance product, when risks flare up, annuities shine for those who have them. The stock market downdraft and subsequent volatility this year have been the nightmare scenario that many retirees hope to avoid, but Sue Blodgett, a 64-year-old single retiree from Orange, Calif., hasn’t lost sleep. She credits that to her portfolio’s secret sauce: a variable annuity that pays out guaranteed income no matter what happens to the markets or how long she lives.
“This has been huge,” says Blodgett, a former director of finance at Boeing’s defense, space, and security division. “It has given me security knowing I’m not forced to go to my investments for income when the market is down.”
For savers who don’t have an annuity but want to tuck some guarantees into their portfolios, some contracts can still be a good fit, says Loreen Gilbert, founder and CEO of WealthWise Financial Services in Irvine, Calif. “As rider payouts have been going down, the [RILAs] are a good addition by insurers,” Gilbert says. “And I still think there are products out there on the variable-annuity and fixed-indexed annuity side that look attractive.”
Beyond annuity features, investors are faced with yet another choice lately: whether to secure a contract through a commission-based sale or a fee-based advisor. Annuities have traditionally been sold through insurance agents and brokers on commission, but insurers have been launching fee-based contracts over the past two years to enable fee-based registered investment advisors to offer them to clients.
David Lau, founder and CEO of DPL Financial Partners, which compiles a universe of fee-based annuities as a resource for advisors, says some 3,000 advisors from 800 firms have signed on to access his paid services over the past two years. This reflects a remarkable shift among advisors, who have typically avoided annuities because of their complexities.
“I come from the investment side. I was never an insurance person,” says WealthWise’s Gilbert. “But I use annuities for my clients to hedge and protect—to safeguard retirement income and supplement Social Security. I don’t know if a client is going to live to 105 or 75, so how else do we plan for that?”
source article: https://www.barrons.com/articles/the-best-annuities-51595028594