Variable Annuities with Lifetime Income Benefits Offer Strategic Value in Retirement Planning
The market for annuity products continues to grow, but recent research underscores the ongoing relevance of traditional variable annuities (VAs) with lifetime income benefit riders. A white paper by Wade Pfau of The American College, commissioned by Equitable, evaluates when these VAs provide the strongest relative value to retirees. The study highlights how lifetime income benefits function as a financial safeguard, effectively acting as a put option against market downturns by guaranteeing protected income even if account balances are depleted.
Pfau's analysis includes diverse factors such as retirement and issue ages, asset allocations, and spending rates relative to retirement assets. His findings indicate that initiating retirement income through a VA between ages 60 and 70 offers the most substantial relative advantage. Additionally, VAs with a 10-year deferral period before income begins are beneficial for clients starting retirement between ages 60 and 75, supporting the value of purchasing VAs earlier in the accumulation phase for later retirement use.
An important insight from the research is that annuities can enable greater risk tolerance in investment strategies. Since income is secured against market volatility, retirees may adopt more aggressive asset allocations to seek enhanced growth potential. This flexibility can improve overall retirement outcomes by leveraging market risk premiums while maintaining income stability.
The study also challenges conventional wisdom regarding annuity use across different funding levels. For well-funded retirees, allocating a portion of assets to annuities helps reduce withdrawal pressure on non-annuity investments, potentially increasing legacy accumulation. Conversely, underfunded retirees benefit significantly from the risk pooling feature of annuities, as guaranteed lifetime income continues after other assets are depleted, which enhances retirement security.
Advisors are encouraged to differentiate retirement income planning from preretirement wealth management by emphasizing the importance of risk pooling through annuities. This approach transitions clients from self-managing longevity and market risk to leveraging insurance solutions that stabilize income streams over an uncertain retirement horizon. Equitable's managing director for individual retirement highlights the widespread concern among retirees about outliving assets, advocating for guaranteed lifetime income solutions as a core component of retirement strategies.
Overall, Pfau's research supports variable annuities with lifetime income benefits as a valuable tool in retirement planning that aligns investment flexibility with income protection. This aligns with broader market needs for solutions addressing sequence of returns risk and the unpredictability of retirement longevity, making these annuities a relevant consideration for both advisors and retirees navigating complex retirement landscapes.