"I had some clients whose retirements were saved because of [variable annuity] contracts they purchased before the financial crisis," said Marc Ruiz, a financial advisor with Oak Partners and a registered rep with SII Investments.
The terms and prices of variable annuities were much better before the financial crisis, but the rationale for a contract that guarantees an income stream while allowing for some participation in potential growth in the investment markets remains intact, according to Mark Cortazzo, senior partner at Macro Consulting Group.
"We were spoiled rotten by the rich pre-financial crisis contracts," Cortazzo said. "But at the end of the day, if you're a conservative investor, having a variable annuity as a way of transferring risk can still be valuable."
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The value is in the guarantee. If retirees are depending on an investment portfolio for income in retirement, a 2008-like plunge can be devastating. A 5 percent withdrawal rate is suddenly 10 percent. And if the market doesn't recover rapidly or you don't have the stomach to stay invested, the portfolio will not last.
While the value of underlying subaccounts of variable annuities fell through the floor like everything else in the market in 2008, the guaranteed income withdrawal rate (not to be confused with the rate of return of the investment portfolio) did not. Those terms are set when the contract is signed and are based on the highest value of the investment portfolio. In other words, the income stream can go up if the market does, but won't go down even if your account value goes to zero.
"It's about the guarantee," said Oak Partners' Ruiz, adding that one or two clients out of every 10 purchases a variable annuity contract. "The growth potential is constrained by costs and the investment options, but they're a solution for immediate or imminent income needs."