Using Variable Annuities as Fixed Income Alternatives

At a time when it appears the best the Federal Reserve will do this year is deliver one rate cut – if that – the primary allure of most fixed income strategies is high starting yields. Historically speaking, the higher a bond’s yield is when an investor purchases it, the short the investor’s odds are of success.

Data confirm that strategy works well over the long-term, but as advisors know, many clients that are heavily allocated to bonds for income purposes don’t have the luxury of waiting for interest rates to decline in earnest. Many of these clients are retirees and pre-retirees, meaning they need income now and it needs to be sourced with reduced volatility.

Considering those points, it’s not surprising that while the 60/40 portfolio construction is somewhat resurgent, concerns linger. Those include the specter of interest rates remaining higher for longer than expected (they already have) – a scenario that would saddle income investors with an extend run of subpar returns and more volatility than they’re bargaining for.

Fortunately, there are ways to avoid those issues, one of which is with variable annuities featuring guaranteed lifetime withdrawal benefits.

Why Variable Annuities Matter Today

Variable annuities help clients access tax-efficient income. For financial professionals looking to articulate the benefits and inner workings of variable annuities, it boils down to a few simple premises: a long-term approach, access to top investment managers, tax-deferral and lifetime income.

What makes variable annuities with guaranteed lifetime withdrawal perks appealing to both advisors and clients is that products not only serve as fixed income alternatives, but provide liquidity while providing income that help maintain an attractive lifestyle, even it lasts much longer than expected.

“Because your clients need a specific amount to be able to live comfortably in retirement, adding a variable annuity can help guarantee income for life. Your clients don’t know how long they’ll live, and they can’t usually predict market returns that’ll impact their investment portfolios during retirement,” notes Nationwide.

In what marks good news for advisors, the benefits of variable annuities with lifetime income are abundant and easy to convey to clients.

“As a reminder, these products provide a combination of downside protection with a guaranteed income stream, upside growth potential through the underlying subaccount investments, and potential liquidity for the underlying assets, while also offering for tax deferral,” adds Nationwide. “Clients can see their account values, continue to invest in stocks, bonds, and other asset classes within the annuity subaccounts, and any funds remaining at death are available to beneficiaries as a death benefit.”

Discussing the Cost Issue

There are no shortage of inexpensive fixed income funds on the market today and it’s true variable annuities with lifetime income withdrawals carry higher fees than basic bond strategies.

Undoubtedly, low fees are attractive, but when it comes to variable annuities with lifetime income withdrawals, the juice may be worth the higher fee squeeze depending upon the client.

“Is an investments-only strategy with lower internal fees preferable if its approach to managing longevity and sequence risk means that the client must either spend less or delay financial independence because it is necessary to earmark a larger overall asset base to ensure that retirement spending goals can be covered?,” concludes Nationwide. “That’s the context in which to assess fees: Can they support better outcomes through risk pooling that reduces the overall costs of the plan in terms of the asset base required to meet the financial goals of retirement? Our simulationsshow that the answer to this question can indeed be yes.”

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