To the editor,
Your article on GLWB guarantees on variable annuities has many flaws and fails to take into account several important features of some of the variable annuity offerings.
For one, the writer used Vanguard as his example. The GLWB is based on 5% of the amount of the purchase. The better annuity products offer a withdrawal on the purchase plus a minimum growth rate, often guaranteeing a doubling of the amount deposited in 10 to 12 years.
Secondly, the author failed to take into account the reality of what happens to retirees in a bad stock market. The majority of them want to pull all or most of their money out of the market when there are large drops in the market. They do not want to take a chance on losing what assets they have accumulated. This is a critical component of the importance of these guarantee riders. Without them, a large percentage of retirees would have little or no money in the stock market due to fear and uncertainty. They do not trust the current stock market because of the poor performance of the last 10 years and the crash of 2008. Without the guarantee, they would likely have the majority of their retirement assets in money markets or CDs paying 1% or less.
If the author is going to dismiss the importance of these riders, he should do a hypothetical analysis based on clients taking their money out of the market and putting it in CDs at %1 or 2% for five to 10 years. That is the reality of what would happen. These guarantees give retirees the peace of mind to be able to stay in the stock market even when things are really bad and they would otherwise have jumped ship.
There is no cost-of-living adjustment in savings accounts or CDs or even bonds for that matter. The only way to keep up with inflation is to be in the stock market. Therefore, having a guarantee that allows you to stay in for the long haul is certainly better than having to spend the rest of their retirement worrying if they are going to lose their money and be without income. This is critical and should not be ignored. Taking client emotions and fears into consideration is just as important if not more important than just crunching numbers based on performance.
Regards
Mark E Bilodeau, CFP
Commonwealth Financial Resources
Chelmsford, MA
Wade Pfau responds:
Thank you for the comments. I don't think that my choice to model the Vanguard GLWB is a flaw in the analysis. I was upfront about that. Other GLWBs may offer more attractive return opportunities, but they also must have a more complicated fee structure than Vanguard's relatively simple offering. I have not analyzed other GLWBs and cannot provide any overall conclusion about the tradeoffs between their features and their fees.
Regarding your other point about asset allocation, it is interesting, but I am not necessarily convinced it is right. It is a hard research question to investigate. GLWB owners may behave differently after a market drop, but that could be either because of the guarantee provided by the GLWB or because the people who purchase GLWBs otherwise have a different psychological demeanor than those who don't. To show your point, we would really need to run some sort of randomized experiment in order to see the impact of the GLWB guarantee on asset allocation. That being said, for clients whose behaviors fit your description, then this certainly should be viewed as an additional benefit of GLWBs. I do not dispute that.
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