Who's Afraid of the Big Bad Annuity?

Physician's Money Digest, April 2007, Volume 14, Issue 4

The mere mention of variable annuities (VAs) isenough to send many physicians running forcover. Few financial products have receivedworse publicity. VAs have been beaten up so badly bythe media that financial advisors are reluctant to evensuggest them, even when they make sense for theirclients. "They're too expensive and the insurance companykeeps your money when you die" is the typicalreaction to them.

The New Living Benefit Rider

However, a new living benefit rider for some variableannuities has emerged, and it is generating quite astir—a positive one. The rider includes a guaranteedminimum income benefit (GMIB), which offers theopportunity for capital appreciation comparable to a401(k), but with income guarantees similar to a pensionplan, according to Tom Scott, an independentfinancial advisor for Linsco Private Ledger, one of thenation's largest broker/dealers.

Scott says even his most wary physician-clientsbecome interested once they understand how theGMIB works and the significant benefits it offers.Scott is not preaching something he does not practice;80% of his own retirement assets are invested in VAswith the GMIB rider.

One product, for example, guarantees a 5% annualbenefit on the deposited amount. Investors canchoose virtually any class of asset or mix. If they don'ttake distributions for the first 10 years, the living benefitincreases by 5%, compounded annually, regardlessof investment performance. In addition, if the accountperforms better than the guaranteed rate, the benefitbase is increased annually to match the actual accountbalance, even during the withdrawal phase.

So if a physician withdraws 5% annually on a$500,000 account (ie, $25,000), and the accountgrows to $600,000, they are now entitled to withdraw$30,000 annually for the rest of their life, evenif their balance is reduced due to future marketdrops. This assumes income distributions begin afterthe age designated by the contract, typically age 65,but in some cases, age 60 or younger. If distributionsare taken prior to the specified age, income is guaranteedfor 20 years.

Better than Equities?

Scott says using VAs with this new feature in aretirement portfolio can be preferable to using equities."Physicians who retired in the late 1990s or early2000s and relied on stock portfolios for their incomeare likely to have suffered serious losses to their investmentprincipal. Even when the markets recovered andthey recouped some of their losses, their asset base hasdeteriorated, and they have been subjected to unnecessaryemotional stress," he says. "If they had a guaranteedliving benefit, market drops or principal losseswould mean little to them since they would still beguaranteed their retirement income for life."

That's one reason why a product with a GMIB canbe so appealing in a retirement planning strategy.

A VA with a GMIB rider is typically 100 to 200basis points higher when compared to the average noloadmutual fund. Scott suggests it may be worth thedifference since retirees typically sacrifice performancein exchange for lower portfolio volatility. "Knowingyou cannot outlive your income and that you have aguaranteed income stream for the rest of your life canoffset the small difference in cost," he adds.

Mike Dubes writes on financial topics from San Diego, Calif. Hiswork has been published in newspapers and magazines acrossthe country. He welcomes questions or comments at md@frontpage-media.com.