Funding Retirement in Post-4% Rule World

But annuities are terrible, right?

Many advisors will ask, "But what about expenses? Those guarantees cost 4%, and lockup periods are very long and expensive. My client doesn't want to annuitize. Annuities are so hard to understand, layered with other fees, and they force really conservative allocations or they're not safe enough. I can't bill on those assets or see them in my portfolio management system."

Sometimes.

So-called “next-gen” no-load variable annuities with GLWBs aren't like that:

• They don't pay commission;
• They don't have lock-up (surrender) periods;
• Fees are low (20 – 65 basis points in mortality and expense fees, and up to 125 basis points for the guarantee)
• They may not force annuitization;
• They've been simplified and offer more investment choices when compared to traditional commission-based annuities;
• They may allow equity exposure of up to 80% for folks who want or need to potentially grow those assets further;
• Some allow for fees to be drawn directly from the asset without impacting the withdrawal (or “benefit”) base; and
• Data feeds through DST, DTCC and others make them visible on favored RIA technologies

Let’s put $1 million in a next-gen annuity

Let's say an investor has saved $1 million in her traditional IRA. She wants to take half of that asset and create a monthly paycheck to supplement Social Security and other income streams. If 4% is her safe spending rate, that $500,000 would generate $20,000 in income. Deduct her advisor's management fee and that $20,000 becomes $15,000… before taxes.

If she takes that same $500,000 and invests in a low-cost, no-load variable annuity with an income guarantee of 5.5% (with a benefit base that would increase 5% for every year she didn't take income), she could boost that retirement paycheck by 25% in five years. That withdrawal base could grow even if her account lost value. And it's guaranteed for life. The price tag? About 1.25% annually for the guarantee, roughly .50% for the annuity itself.

Some no-load annuities with GLWB riders even allow for the advisor to draw their management fee from the annuity without affecting the withdrawal base. In that case, the annual pre-tax income stream in the above example would then be $34,375 – more than double the 4% withdrawal regime – for life and guaranteed.

Consider this: The historical nominal rate of return for the stock market in the 1990s was 18.7%. In the 2000s, it was 1.07%. (source: TIAA) in our current decade, stocks are returning 13.2%. Some folks believe lean periods always follow fat ones. In the near future, the ability to create reliable, sustainable income streams in retirement may depend on the use of some sort of annuity structure.

Solving the annuitization puzzle

Though economists have been advocating for annuitization to address longevity risk for a long time, investors almost never annuitize. It can be difficult to imagine giving a large sum of money to an insurance company and asking them to transform it into monthly payments. Liquidity is lost and there is no longer a cash value. This annuitization puzzle may not be solvable.

In the right circumstance, though, a low-cost, no-load variable annuity with an income guarantee can ensure a retirement income stream for a portion of qualified IRA assets and help ground retirees on their path through retirement. The asset remains liquid. The guarantee can be 'turned off' at any time. With unprecedented low-cost, high-value, excellent withdrawal rates and flexibility, it's difficult to understand how anyone could be opposed.

David Stone is founder and CEO of RetireOne, the leading, independent platform for fee-based insurance solutions. Prior to RetireOne, David was chief legal counsel for all of Charles Schwab’s insurance and risk management initiatives. He is a frequent speaker at industry conferences as well as an active participant on numerous committees dedicated to retirement-income product solutions.

Read more articles by David Stone