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Principal Financial Group Inc. of Des Moines, Iowa, yesterday released a white paper that explores the four methods of providing retirees with income.
The paper titled “Four Strategies for Retiring Clients” looks at the pros and cons of using mutual funds with automated income payments, variable annuities with guaranteed minimum withdrawal benefits, income annuities, and a combination of mutual funds and income annuities.
Mutual funds with automatic payments — including endowment-style mutual funds and self-liquidating mutual funds — allow clients to receive annuity-like income and permit investor access to the balance in the account. They also have the potential for growth, according to the white paper
However, they still face market risk and don’t provide sufficient longevity protection. Income payments are also unpredictable because they depend on market performance, so clients won’t be able to draw consistent expense budgets to live on, according to the white paper.
Variable annuities provide an income floor for purchasers, growth opportunities through market exposure and a guaranteed level of minimum income, but the product can be too difficult for owners to understand. Also, fees, including those for the guarantee and fund management, add up and deplete performance.
Even with proper withdrawals, portfolio returns probably won’t offset the fees and inflation pressures in the long term, thus affecting the investor’s spending power, according to the white paper.
Income annuities, which turn a lump sum into a guaranteed payout, can be inflation-protected and don’t expose clients to market risk. However, the product lacks the potential for future account balance growth, and the decision to buy is irrevocable, though some products have liquidity provisions.
Features that would allow a refund if the annuity owner dies are available but at a cost, according to the white paper.
Finally, a combination of mutual funds and income annuities provides the benefit of both products. The percentage of assets allocated to either product can also be tailored according to the client’s level of risk.
Although the pairing of these products provides access to retirement savings and some guaranteed income, there is still some market risk and the decision to opt for guaranteed income payments is irrevocable, according to the white paper.
The paper is available for viewing at https://secure02.principal.com/publicvsupply/GetFile?fm=PQ8683&ty=VOP&EXT=.VOP.
