Ms. Tipton and her adviser, Jim Saulnier, who manages $17 million, initially saw the annuity as a savings vehicle. She jokes about having a “small spending problem.”
“In my mind, the annuity isn't there,” Ms. Tipton said. “I've learned a lot by having it there but being unable to touch it, so I've curtailed my spending and budgeted better.” Her deposit into the annuity made up about 25% of her assets. In addition, she owns a variety of bond mutual funds and a small pension from her late husband's employer.
Because of Ms. Tipton's hesitation about putting all her funds in equities, Mr. Saulnier has kept the variable annuity allocated equally between stocks and bonds. Ms. Tipton was more concerned about having a way to take income later, rather than finding a way to ramp up equity exposure. The account value now stands at about $128,000.
Though Ms. Tipton said the most important feature of the annuity is the guaranteed income stream, Mr. Saulnier said it is the insurance portion of the product, which protects the account and future income from the risk of an investment loss early in the withdrawal phase.
With the guaranteed payout, the income will always keep coming — even if the account value falls to zero, he explained.
That attribute is really a safeguard against market crashes and longevity, the two threats plaguing clients in their 50s and 60s.
“You benefit from the deferral and building up the income base in the event of a market crash,” said Michael Black, an adviser at Michael Phillips Black Wealth Management, which oversees $100 million in assets. A number of his clients have benefited from locking in a high value when the markets were better, thus having access to a bigger income base.
“A big market drop or a long lifetime will dictate whether the insurance company pays; the company only pays when you run out of money,” he added. “This gives peace of mind to the investor and allows them to invest more aggressively.”
The chance to jump into equities while fencing in risk got James Huber, an 80-year-old investor, interested in a variable annuity. In 2005, Christopher J. Olsen, a financial adviser with Ameriprise Financial Inc. who manages $40 million in assets, exchanged Mr. Huber's old variable annuity for a RiverSource product with a death benefit. The $300,000 variable annuity was just one of several investments Mr. Huber owned; his other assets included mutual funds and a pension.
“I don't really need the annuity, so I set it up for my kids so that it can build up and I can leave them something,” Mr. Huber said. In this case, the client's children would receive the account's high water mark as a death benefit, Mr. Olsen said.
The exchange made sense because surrendering the variable annuity would trigger taxes, he said. Further, while the death benefit was not a primary driver of the exchange, it became more important as Mr. Huber aged and became harder to insure, the adviser said.
During the fall of 2008, Mr. Olsen ramped up the equities exposure in the variable annuity, placing the assets into a combination of emerging markets, mid-cap and small-cap funds. As of last October, the account has grown from $280,000 to $450,000.
Mr. Olsen and Mr. Huber have since pulled back slightly on their exposure to emerging markets, placing some of the gains into bond funds for added security. The variable annuity allowed Mr. Huber to get a little adventurous with his investments without having to worry about market declines' eating away what's being left to his heirs.
“For some older people, it's more of an estate-planning strategy as opposed to an investment. It's not about them, but rather a legacy for the kids,” Mr. Olsen said.
E-mail Darla Mercado at email@example.com.