Until recently, getting a guaranteed income in retirement meant buying an annuity.
But annuities aren't the right product for everyone, and their restrictions can be a turn-off for high-net-worth investors who want more control over their money in retirement.
Wouldn't it be great to have a retirement product that could guarantee investors a steady income for the rest of their lives, without the high cost and restrictions of an annuity?
"Our clients said they didn't like annuities for one reason or another, mostly because of high costs, loss of control and losing the investment at death," said Len Reinhart, a consultant to Pershing Managed Account Solutions.
Reinhart, was previously president of The Bank of New York's separate account services unit and a founding father of the wrap fee industry, said he couldn't find a product that could guarantee an income that wasn't an annuity. That's what prompted him to partner with Phoenix Companies to create one. The end result, called Guaranteed Retirement Income Solutions, or GRIS, wraps an annuity income guarantee around an investment management account.
"We think it's the type of benefit that allows high-net-worth individuals to do retirement planning correctly," he said, as well as offering them peace of mind in the first few years of retirement.
"When markets were booming, investors were interested in return of assets, not so much in preservation," said Kathy Cody, senior vice president of alternative retirement solutions for Phoenix Companies. "Now both are important."
"What you're really insuring against, especially in the beginning of retirement, is a very bad market," Reinhart said, adding that a retirement income guarantee is "like fire insurance; hopefully you'll never need it."
Retirees get nervous about a drop in their portfolio value at age 65 when they are just beginning to draw from their account, said Jim Seuffert, CEO of Pershing Managed Account Solutions.
"People could be living 30 years into retirement or longer," Seuffert said. "With so much time in retirement, it may be prudent to have 100% exposure to equities." Investors can choose to invest 100% in equities, have an 80/20 mix or a 60/40 split, Cody said. "The more you are invested with stocks, the more money you are likely to earn over time," she said.
Under the terms of the agreement, investors agree to withdraw no more than 5% a year, beginning at age 65.
Unlike an annuity, an investor's assets don't go to the insurance company, Reinhart said. He said a $1 million account would pay out $50,000 a year, starting at age 65. When the account is exhausted, typically in 20 years, the guarantee kicks in-paying $50,000 annually until the recipient dies. If the investor dies before the money runs out, the balance returns to his or her estate.
"There is no redemption fee," he said. "We're not asking for a commitment forever. If, during the first year, you take out $100,000 to pay for a medical emergency, the annual benefit drops to $47,000 until you pay back the $100,000."
"If you live to 110, Phoenix pays for 5%, even if your money runs out at 92," Cody said. "Regardless of market conditions, this provides a guarantee on your investment, and you can elect to terminate your account at any time."
Phoenix's income guarantee is currently available only to high-net-worth investors who maintain accounts with at least $250,000 with Lockwood Capital Management.
A quarter million is really the starting point, however, and most of the accounts are much higher. Reinhart said the biggest account is $18 million. While the initial launch was targeted to Lockwood, the arrangement is not exclusive and Phoenix is looking for new partners, Cody said.
The guaranteed income is intended to be used as a customization tool for Baby Boomers to fine-tune and enhance their retirement strategy, Reinhart said.
"We're not leading with insurance; we're leading with high-net-worth, well-diversified, institutional quality money management with the option for income guarantee, starting at age 65," Seuffert said. "All the ingredients make for a super product for the high-net-worth individual."
"There is a tremendous amount of interest in this," he said. "The reception has been amazing, and we expect other providers will be right behind this one."
John Hancock Retirement Plan Services offers a similar product called Guaranteed Income for Life, targeted at 401(k) plans.
"As individuals rely more heavily on 401(k) plans for their retirement funding, plan sponsors are looking for options that offer their employees more certainty," said Ed Eng, senior vice president of John Hancock RPS. "We believe that adding Guaranteed Income for Life to their plans is the right solution because it helps minimize some of the common risks encountered in retirement, like retiring in a down market or outliving retirement savings."
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