Annuities a retirement option

Many baby boomers are waiting to retire.

Or perhaps it’s more accurate to say that they are waiting for their income stream to allow them to retire.

But after the stock market’s nerve-wracking decline during 2008, many are skittish about investing in equities.

A Center for Retirement Research at Boston College study showed that aside from Social Security, 401(k)s were the only source of retirement income for 63 percent of Americans during 2004. (And that was before the Great Recession.)

There is one investing option that many business owners and retirement plan sponsors are not aware of, said Bob Book, director of retirement plans for Strategic Financial Partners.

A variable annuity contract with a living benefit guarantee, within a 401(k) plan, guarantees a minimum amount of future income.

For instance, if someone invested $100,000 during February, then 12 months later he or she would be able to withdraw income from $106,000, a 6 percent increase (each plan and provider has different guarantees and rates), regardless of market performance.

“And it has a ratchet effect,” Book said. “You lock that gain in, but you don’t lock in a loss — even if the fund itself went down.”

Variable annuities are what Book calls “panic preventers.”

According to a John Hancock study, 65 percent of plan participants say that a guaranteed option would increase their satisfaction with their 401(k) plan, and 70 percent of employers say that a guaranteed option would benefit their 401(k) plan.

But if employers do add it as an option to their 401(k) plan, they also need to offer education for the plan participants (employees).

“Without education, either no one will use the option, or the wrong people will use it,” Book said. “It’s complex, and education is crucial. It’s not for everybody — but something to consider.”

In order to achieve one’s goals, it is necessary to outpace inflation and create a retirement income for the future.

“Most people realize they have to be invested (at least somewhat) in equities,” he said. “But emotion gets in the way. Many people are willing to take on risk when things are going well.”

However, when the market declines dramatically, they move to the sidelines.

“And the only thing that will encourage them to get back into the market is when it starts to improve — and then they gain confidence,” Book said. “But how do you know when to get back in?”

The stock market is up about 56 percent from its March 2009 low, and down 7 percent since its Jan. 19 high. Jumping in and out of the market, like so many children playing hopscotch, doesn’t do investors any favors because they miss out on the gains as well as the losses — and gains, over time, far outweigh the losses.

Book tries to help clients control the things they can control and understand — and to manage the things they can’t.

“Obviously, we cannot control the stock market or taxes — or to a degree, income, job status and health — but you can control your spending. Your most powerful asset is your cash flow.

“If you’re so leveraged each month that you can’t save, then you can’t make the investment you need for the future,” he said.

And investors who modify their spending to have cash flow don’t have to take the same amount of risk to reach the same objective.

“You can create a more conservative portfolio and have a much more predictable result,” he said.

“And putting money in systematically is so crucial,” Book said. “A lot of people not only panic and pull out of the market,” but they quit investing any money at all.

“If I have an income guarantee and the market goes down, then I’m not so concerned. As a matter of fact, I’m happy to put more money in. You know what the end result is — at a minimum — so you are more likely to not only stay invested, but to add to it each month. No matter what, with a variable annuity, I won’t go backward — I’ll always go forward,” Book said.

There are “downsides,” he said, including cost — participants pay 0.5 to 1 percent in costs, and for individuals a variable annuity can be complex.

And portability of the annuity is not perfected but is improving. Some plans allow participants who leave their jobs to roll the annuity into an Individual Retirement Account with the same guarantee and value.

A variable annuity is not for all investors, but it could be ideal for those approaching retirement. “You have a withdrawal benefit guarantee (a guaranteed distribution rate), and you have the principal to pass on if you die. Your income could go up, but it will never go down.

“It allows people to have equity exposure without outliving income. They can participate in the upside of the market,” Book said, “but not the downside.”

Rebecca Tonn covers banking and finance for the Colorado Springs Business Journal.