What is your opinion of using a managed payout fund vs. a deferred income annuity as part of a retirement portfolio? I am 61 years old and plan to retire in 5 years.
Terry Says: There’s a huge difference. The deferred income annuity gives you a promised rate for a period of time, during which your account grows tax-deferred. At some point in the future (after surrender charges are over — that’s important!) you can take some or all of the money out, paying taxes at your then-current rate, on the gains. Or you can decide to take lifetime payouts (your lifetime, you and your spouse) of a fixed amount monthly for as long as you (or both of you live). A portion, representing the gains, will be taxable — assuming you put after-tax money into the annuity to start out (ie not IRA money).
But in that latter case, where you take a lifetime annuity, if you die in a few years, the insurer keeps all the money! And if you live “too long”, inflation may make that guaranteed monthly payment have far lower buying power than you expected. (Remember, at only 3% inflation, the value –spending power — of your money is cut in half in only 25 years!
The managed payout fund is an entirely different product. It is an investment account, that seeks — but does not promise — a fixed percentage payout each year. If the fund earns that money (through dividends, capital gains, rising stock prices), then your check will not cut into your capital investment. But since they are paying out a promised amount each year, they may have to dig into your investment money to make good on the promised payments. There is no guarantee that the money in the account, or the payouts, will last your lifetime. But in a bull market, your payout could actually rise, as they are taking a percentage of your account to pay you — typically 4% of your account, which is the most actuarially likely to make your money last as long as you do. Again, though, there is no promise, and there is investment risk. But you do have flexibility. You can dip into your capital account if you need cash, although that will impact the amount of your managed payment.
Remember, there is never a “free lunch”! If you want a potentially larger payout, you give up guarantees of lifetime income. If you want flexibility, you cannot annuitize. And even with a deferred annuity, you have to worry about being “locked in” to a low rate promised in the contract when general interest rates rise. And then you’d have to pay quite a penalty — a surrender charge — to take the money out and reinvest in something else! There are always tradeoffs!
My general approach would be to not lock yourself into one product or the other, but after assessing your own situation, other assets, etc, perhaps do a bit of both! (That way you’re never “all wrong”!)