I'm back at this week with another annuity review. This one again was at the request of a blog reader who has yet to purchase but is contemplating the Nationwide Destination B Annuity with Lifetime Income Rider. One of my business partners was doing some research this week and found a really interesting fact about variable annuities. In the 4th quarter of 2011 over 90% of variable annuities sold had some type of guaranteed income rider. Wow, talk about market share!
It comes as no surprise to me now why so many people ask me about various annuities with income guarantees. Given the portion of population in our country rapidly reaching their retirement years, the stock market being anything but predictable, and interest rates at record lows - it's know wonder so many companies and advisors are marketing retirement income as their go-to specialty.
In the case of this annuity it is no different. Someone concerned about the market/economy/interest rates who's getting close to retirement and wants to protect their nest egg was suggested it would be wise to put almost 70% of their investment assets into the Nationwide Destination B. The reasoning makes perfect sense and I completely understand the desire to keep a good portion of the nest egg safe (as well as future retirement income), but now it's time to test the product and see if the actual results are close to the marketed results.
Here's the quick facts about the Nationwide Destination B Annuity (with Lifetime Income Rider - or L.INC as it's referred to)
- This is a variable annuity which means the money invested gets allocated to multiple funds called "sub-accounts." Sub-accounts look much like mutual funds and most are managed by mutual fund companies. Because these funds can go up or down is why the annuity is Variable instead of Fixed (where it cannot go down).
- Like most variable annuities Destination B has multiple "riders" that can be added on to the base annuity. The two riders most common are for enhanced death benefit and for guaranteed income. In the case of this annuity the Lifetime Income Guarantee was a primary driver of interest to the potential investor. *note - I didn't recommend this - I'm just the guy doing the review*
- The Lifetime Income Rider (L.INC) grows an "income base" by 10% simple interest per year for up to 10 years or until the account owner turns 81 years old - whichever happens sooner. So if you started with $100,000 after 10 years there would be an income base worth $200,000. It's important to note that you can never actually take the entire income base at once. Rather you can take an income from that amount based on your age when you begin income and whether or not it is on one life or two lives. That table is below:
To translate this rider into plain english - if you start by investing $100,000 at age 60 and let the money grow for 10 years, at age 70 you'll be able to to take 4.75% of $200,000 - or $9,500 per year. That is the worst case scenario, you could do better (though I highly doubt it - see the video below to learn why).
If you have a spouse younger than you though it would be very un-wise (if there's such a word) to opt for single life guarantees. I say this because the cost of this annuity is very high and there is a high probability there wouldn't be much left when you pass - maybe even nothing at all.
With that being the case for guaranteed joint life income you'd be looking at 4.25% if you and your spouse are the same age.
A word of Caution Regarding L.INC
In the fine print it says that the Lifetime Income (L.INC) guaranteed lifetime payout percentage is based on the younger of the two people on the account. So if your spouse is, say 51 when issued and only 61 when you decide to take income, then the guaranteed lifetime income would only be 3.25%. This is significant as it would drop the $9,500 from my example above to just $6,250 with spousal continuation.
Fees of the Nationwide Destination B Annuity
Like many other variable annuities the costs of Destination B can be quite high. Here's a rundown directly from their prospectus of the potential fees:
That's a lot of potential expenses!
For simplicity sake I reviewed this annuity as it was explained to me from the blog reader who asked for the review. In their case they would have the base charges (mortality and expense as well as administrative), the Lifetime Income 10% option, and the average of sub accounts. The average of sub accounts (funds) is 1.12% - though some funds cost as much as 1.85%.
All told this annuity is easily in the 3.5% and higher camp with the potential of being over 5% PER YEAR. That is not cheap and greatly impacts performance.
You can read about these fees and their meanings either in the Prospectus or on the Nationwide Website Here.
Destination B with Lifetime Income Rider Video Review
To help illustrate the real return potential of the annuity I broke it down via video. I do this for all my reviews as it is helpful for blog readers to see how I arrive at my return conclusions and be as transparent about it as possible. You can watch that video below:
In the video you'll see me struggling a bit to find a website that helps people see what their life expectancy is. As promised, here's a link to that site so you can see where I was going with that:
Nationwide Destination B Variable Annuity (with Lifetime Income Rider) Conclusions
Overall I'm finding most variable annuities with income guarantees to be awfully similar. They all sound great, but fail to deliver at the rates commonly referred to in their advertising.
In the case of Destination B the guarantee is not even close to the 10% or 4.75% return promises. On most life expectancies it delivers closer to 3%. In order to make a middle single digit return you'd need to live about 15 years beyond your life expectancy - which is only 12% probable.
As a pure long term growth investment the annuity struggles a bit too due to the impact of expenses. In the video you see that pretty clearly as the 50 year return of the S&P 500 (with dividends) is about 7.5% and the expenses of this annuity are nearly 1/2 of that. The 50 year average for bonds is about 6% so the expenses take an even bigger portion of assets allocated to income funds.
All told this annuity is neither much better or much worse than other variable annuities I've reviewed. Just meh as they say on the web.
So if you're looking for guaranteed income for life there are certainly better paying alternatives and if you're looking for long term growth the same is true.
What if the Market Crashes? Wouldn't this be a Good Alternative?
This is a common response I get from investors and professionals when I break down annuities. The answer is "yes!" Having some type of guarantee is better than none at all. But there are better guarantees out there and there are also plenty of strategies for the "non-guaranteed money" investors might have too. It just takes a lot of research to find them. If you have questions in this regard I've got good news for you - I do this type of research all the time and am always happy to share the best in both the guaranteed and non-guaranteed worlds. Just use the contact form on the site and I'll do my best to help you out.
Why am I spending so much time on annuity reviews?
Many blog readers and clients have asked me this lately - so I figured I'd just put it here on the blog in case you were wondering the same. As a fiduciary who is looking out for my clients best interests it's my resonsibility to make sure I'm constantly vetting out all potential investments to ensure we're using the best ones. Often times I'm asked to take a look at annuities because their advertisements make them sound too good to be true.
Sales agents eager for commission often don't do the type of analysis I do - perhaps because of their conflict of interest. After all, making 5% to 10% commission on an annuity can add up pretty fast if you're selling them hundreds of thousands of dollars at a time.
So I try to be the voice of reason that looks under the hood, reads and understands the 100+ page prospectuses, and makes sure my clients only invest in what's truly best for them. In an effort to help non-clients I started putting this same information on my blog and so far it's been a huge hit. I get hundreds of emails and many words of thanks from good people all over the US just trying to do their best and letting me know this research is helping them greatly.
I hope you enjoyed this review. As always, if you have questions, see items that need clarification, or if you're an investment professional and you noticed something I overlooked - just let me know.