ENHANCING YOUR CLIENT'S RETIREMENT INCOME POTENTIAL
David Giertz

David Giertz is President, Financial Institution Distributors Agency, Nationwide Financial.
 
 

IN TODAY'S economic climate, your clients may be worried about having enough income in retirement.

A recent Ibbotson Associates study, sponsored by Nationwide, sought to test the hypothesis that one can increase clients' income potential and reduce their income risk (defined as the downside fluctuation of the income stream from year to year) by adding a variable annuity (VA) with a guaranteed minimum withdrawal benefit rider (GMWB) to their retirement income portfolio.

The rationale is that a variable annuity allows the client to participate in the market with the potential to increase their portfolio, while the guaranteed income and the guaranteed roll up of the income benefit base offered by a GMWB offsets market risk. Guarantees are subject to the claims-paying ability of the issuing insurance company.

Ibbotson Associates study

In its study to test this hypothesis, Ibbotson performed a series of simulation analyses across three portfolio scenarios:

1. A diversified VA with a lifetime GMWB
2. A diversified traditional non-annuity portfolio, such as mutual funds, and
3. A combination of a VA with a lifetime GMWB and traditional non-annuity products

The results (see chart) showed that the third scenario had:

• higher average total income return
• higher total income withdrawals
• lower negative income return

The long-term advantage of an optional benefit will vary with the terms of the benefit option, the investment performance of the variable investment options selected, and the length of time the annuity is owned. As a result, in some circumstances, the cost of an option may exceed the actual benefit paid under the option.

How can you best utilize these findings to benefit your clients?

The concept we're suggesting, adding a VA+GMWB to a retirement portfolio to reduce income risk, is easy to implement. The premise is to replace a portion of your client's bond portfolio with a variable annuity with a more aggressive equity allocation. By doing this, you'll create a slightly more aggressive portfolio. This gives your client the potential to accumulate more assets, giving them the potential for more income, while potentially reducing the overall portfolio's income risk.

It's important to understand this is a complementary strategy to help enhance your client's retirement income and isn't meant to replace how you're currently constructing income portfolios for your clients. It's one small change that could have a meaningful impact on their overall success.

For a copy of the Ibbotson study, call your Nationwide wholesaler at 1-800-893-5399.

When evaluating the purchase of a variable annuity, your clients should be aware that variable annuities are long-term investment vehicles designed for retirement purposes and will fluctuate in value; annuities have limitations; investing involves market risk, including possible loss of principal; a guaranteed minimum withdrawal benefit is an optional rider available on certain variable annuity contracts for an additional fee.

Both the product prospectus and underlying fund prospectus can be obtained by writing to the issuing company.

The general distributor for variable annuity contracts and variable life insurance policies is Nationwide Investment Services Corporation, member FINRA. In MI Only: Nationwide Investment Svcs. Corporation. Nationwide is a federally registered service mark of Nationwide Mutual Insurance Company.

Ibbotson Associates, Inc. is a registered investment advisor and wholly owned subsidiary of Morningstar, Inc. The Ibbotson name and logo are property of Ibbotson. The study described is the proprietary property of Ibbotson, and may not be reproduced, in whole or part, in any manner, without the prior written consent of Ibbotson. Ibbotson and its affiliates are not related to Nationwide and its affiliates.

Before offering this type of product to your clients, please determine suitability first and make them aware of its risks, fees and limitations.