Why Variable Annuities Make Sense In This Market

OCEAN CITY – Last year, many investors in and approaching retirement experienced significant losses in their portfolios. Now seeking ways to safeguard their retirement savings from volatility, they are turning to variable annuities for security and steady income.

“Variable annuities became increasingly popular over the last few years as new options for optimizing retirement income became available,” said Robert Rohrbach, Vice President and Annuity Product Manager for Merrill Lynch. “The recent market decline underscores the value of using variable annuities to help secure retirement income.”

For instance, with the markets down approximately 40% from this time last year, investors who relied on 5% of income from their traditional retirement plans must now draw as much as 8% to 10% to get the same amount of income, says Rohrbach.

“A portfolio with an 8% to 10% withdrawal rate runs a serious risk of withdrawals depleting assets to $0 before the end of a retired individual’s lifetime. Adding an annuity to the mix, with its optional guaranteed benefits that provide a guaranteed income stream, can help offset this risk of outliving one’s assets — known as longevity risk,” he said.

The security of variable annuities derives directly from the way they work. Depending on how close you are to retirement, and even if you are in it, you may benefit from adding one of the three most commonly purchased riders — optional provisions that provide specific benefits.

Protect withdrawals. “People who need income now or in the near future often choose a guaranteed minimum withdrawal benefit (GMWB) rider,” Rohrbach points out. “This benefit may suit people already in or approaching retirement who would like to begin withdrawals but also want the opportunity to grow their assets and minimum income amount should a bull market materialize.” A GMWB allows these investors to withdraw a predetermined minimum amount (say, 5% on a $500,000 annuity, or $25,000), locking in a sustainable annual income level regardless of market performance, provided no excess withdrawals are taken.

Protect future income. “With the guaranteed minimum income benefit (GMIB) rider, the longer you wait to begin taking income, the richer the benefit it provides,” Rohrbach says. “Because of that, it tends to best meet the needs of investors for whom retirement is further off and who want to establish a minimum future income floor—regardless of how the markets perform.” This option requires investors to wait a specified number of years before choosing when to annuitize the contract—that is, to convert its base value into a guaranteed income stream.

Protect principal. Investors who are focused on asset preservation but also want some market exposure might consider a guaranteed minimum accumulation benefit (GMAB). Under this type of guarantee, investors will receive at least their principal back as a lump sum—even if the market declines—at the end of the required holding period (commonly 10 years).

Another potential advantage that variable annuities provide is favorable tax treatment of the assets while inside the annuity. The annuity’s earnings grow tax-deferred. You may want to discuss the possible tax implications of a variable annuity on your portfolio with your financial advisor and a qualified tax professional.

(A Merrill Lynch Senior Financial Advisor. She can be reached at 410-213-8520.)