Living in Retirement
Is an annuity right for you?
December 18, 2012
Rebecca Katz: We have a question from Ilene from Havertown, Pennsylvania, asking if we could describe the pros and cons of various types of annuities. And I know to many, the word annuity is sometimes a dirty word, so I think we have to explain what we mean by annuity when we're talking about annuities and then why they might be useful in a retirement income plan. Steve, you want—
Steve Utkus: Sure, I'll take that. So, broadly speaking, there are two classes of annuities. So what I call the "classic annuity" but it goes by the technical term "single-premium immediate annuity." As you take a big chunk of money, hand it over to an insurer for life, and you get a guaranteed income for life plus a survivor benefit if you have a spouse or other partner. So that's a traditional, single-premium immediate annuity, and it's a great tool to get more guaranteed income. Say you have Social Security but you want more guaranteed income for life. But, of course, you give up your money permanently and irrevocably. It's gone, and there are various ways to do that. For example, at Vanguard we have an annuity mart. We can get competing quotes to find that.
Now the second type of annuity, also actually available from Vanguard, is a "variable annuity" which looks like a portfolio of assets that you own, and it has various types. You can get guaranteed income from it. You can get other things from it. But it's more like a portfolio where you control the assets, you can sell the assets, you can add to the assets, you can take distributions that are guaranteed from the assets if you need that as well. And that really is quite a different type of annuity.
So when you look into the world of annuities, you really have to ask yourself—both types can provide some type of guaranteed income if you want it, but is it the sort of traditional that provides a fixed guaranteed income for life where you hand over your assets versus a portfolio?
Rebecca Katz: And it's not an all-or-nothing decision, right? It's not that you have to turn over your entire retirement nest egg?
Maria Bruno: No, and we could argue that it shouldn't be that case. I think when you think about annuities, what we feel is that you really should think about it in terms of what level of guarantee do you want in terms of flows. So first, we talked about Social Security. So that's one guaranteed income stream that you have. And then look at, as far as managing the portfolio, do you feel you want an additional level of guarantee? And perhaps look at a part of that portfolio and say, okay, well go look at quotes, and what income would this provide? And does that feel right in terms of giving up those assets for this income stream?
Rebecca Katz: Okay.
Steve Utkus: You know, I was just going to add one thing because this is a confusing topic— sorry. But the whole type—again, there are these two categories, so I think as you go through this—and we actually have a great sort of educational bit on vanguard.com for anyone interested in this that sort of distinguishes the two, so I encourage our listeners to go take a look at that.
The variable annuities also have some guaranteed income features, but they're very, very different from the traditional annuity that Maria was describing. So it requires more investigation.
Rebecca Katz: Are you alluding to something called a GLWB?
Steve Utkus: Ah, yeah, guaranteed [lifetime] withdrawal benefits which are a type of rider on a variable annuity, which is, again, like a portfolio.
Now the big thing about the GLWB, since this is Vanguard and we're talking about costs, is they come with incredibly high fees to pay for the guarantees. So you have to investigate the nature of the guarantee and the fees and understand why they're charging those fees because that guarantee element's costly.
Rebecca Katz: Yes.
Maria Bruno: And all annuities have the cost, right? They're insurance.
Rebecca Katz: Insurance.
Maria Bruno: They're like an insurance contract. So with income annuities, you would see that in the quote. So it's not a cost per se, but it's all baked into the quote that you would get in terms of a payout.
Rebecca Katz: So a higher cost annuity would have a lower monthly payment that they would promise you?
Maria Bruno: Generally speaking, yes.
All investments are subject to risk, including possible loss of principal.
Product guarantees are subject to the claims-paying ability of the issuing insurance company.
Variable annuities are long-term investment vehicles designed for retirement purposes. They contain underlying investment portfolios that are subject to investment risk, including possible loss of principal.
The Vanguard Variable Annuity is a flexible-premium variable annuity issued by Monumental Life Insurance Company, Cedar Rapids, Iowa (NAIC No. 66281), and in New York State only, by Transamerica Financial Life Insurance Company, Harrison, New York (NAIC No. 70688). Form No. VVAP U 1101 (in Florida, Form No. VVAP U 1101 (FL), in Oregon, Form No. VVAP U 1101 (OR) (R), and in New York VVA NY 0208). GLWB Rider Form No. RGMB 43 0811 (in Florida, RGMB 43 0811 (SI)(FL), RGMB 43 0811 (JT)(FL), in Oregon RGMB 43 0811 (SI)(OR), RGMB 43 0811 (JT)(OR), and in New York RGMB 43 0811 (SI)(NY)(REV), RGMB 43 0811 (JT)(NY)(REV)),without agent representation. Policy and rider form numbers may vary by state and may not be available in all states. The Vanguard Group administers the Vanguard Variable Annuity for the issuer. Its variable annuity and investment costs rank among the lowest in the industry, according to Morningstar, Inc., December 2011. The Vanguard Group's home office and domicile is Valley Forge, Pennsylvania (in California, DBA Vanguard Administrators, Inc., license number 0B91453). The Vanguard Group, Monumental Life Insurance Company, and Transamerica Financial Life Insurance Company do not provide tax advice. Investors are encouraged to consult a tax advisor for information on how annuity taxation applies to their individual situations.
© 2012 The Vanguard Group, Inc. All rights reserved.
Steve Utkus and Maria Bruno on annuities
What are the different types of annuities and which one might be right for you? Maria Bruno of Vanguard Investment Counseling and Steve Utkus of the Vanguard Center for Retirement Research explore various annuities and how they apply to retirement income needs based on how much control you want to maintain over your assets.