Tuesday, October 30, 2012

The Next Generation of Income Guarantee Riders (Part 1)

My new column for October is now available at Advisor Perspectives. It is, "The Next Generation of Income Guarantee Riders: Part 1 – The Deferral Phase."  This project is actually turning out to be the equivalent of writing a full research paper. But rather than one long paper, it will be released in serialized form as my October, November, and December columns.

This column provides a deeper look at income guarantee riders. The motivation for digging into this again (as I wrote about GLWBs last year) is that earlier in the year, Aria Retirement Solutions created a new income guarantee rider that could be applied to a portfolio of mutual funds and ETFs. It is no longer necessary to buy a variable annuity to obtain access to such a rider. That is both esoteric and exciting at the same time.

As I worked on this initially to compare the features of Aria's RetireOne guarantee to Vanguard's GLWB (an apt comparison, since both riders are underwritten by the same insurance company), I ended up finding many things to look at in more depth.

This first column provides a look at how these guarantees would have fared historically in supporting a guaranteed benefit base over a 10-year deferral period. Since the guarantees are not inflation-adjusted, I find that the amount of downside protection provided by the guarantees may be less than people expect. As I summarize in the conclusion:

[Those] seeking to protect against a sequence of bad returns just before retirement will find that the guarantee still leaves them worse off in inflation-adjusted terms, especially as the rider fees hamper the ability of the contracted assets to grow faster than the unguaranteed alternative.

Please have a look!