By Dan L. Bay

Market uncertainty rises every time the Dow Jones Industrial Average (an unmanaged index of 30 widely held stocks) takes off on a volatile ride. Investors wonder if we’re facing a downturn or bear market. I know some clients are worried, afraid that if they don’t sell now they’ll lose more money; yet if they do sell, they might miss a rebound. The only certain thing about volatile markets is that they are uncertain.

Fortunately, there is now a way to remain invested in equities while protecting the future income on an existing retirement portfolio. By simply shifting some assets into a variable annuity with a living benefit, such as a Guaranteed Minimum Withdrawal Benefit (GMWB), you can assure yourself retirement income from a known minimum investment—and the amount may be at least twice the amount of your investment.

When you add a GMWB to a variable annuity, the provider tracks a separate “income account” alongside your regular account. The income account is guaranteed to grow at a rate of 5 percent to 7 percent per annum for at least 10 years (no withdrawals allowed ), and it can be tapped to provide a lifetime income equal to 5 percent of its value at the time the income begins. Generally, you have to be at least 59½ to receive lifetime income.

The graph above shows how this concept can work in an extremely poor market. Although the account value shows virtually no growth over the decade shown, its income account grew at 7 percent per year. In any year, you have the option of receiving 5 percent of the income account balance for life.

However, only the account value is available for lump sum withdrawal, and withdrawals over the 5 percent allowed by the GMWB will negatively impact the benefit.

Of course, such a low return over almost 10 years is very unlikely. But suppose this concept was put to the test in a period similar to 1997–2006, based on the performance of the S&P 500? There were strong gains initially, then a three-year bear market followed by

four strong years. You may have seen little progress overall during this 10-year period. But look at the graph below to see how the “income account” works along with the regular account to capture gains during the up years while still growing in the down years.

From 1997 to 1999, the regular account grows faster than 7 percent per year. Therefore, the insurance company increases the “income account” to match the regular account. Each time the “income account” increases (the industry calls it a “step up”), the insurance company compounds the 7 percent on the basis of this higher amount, so any market gains are captured. When the market goes south, as it did from 2000 to 2002, the “income account” continues to grow at 7 percent. Although the market recovered nicely from 2003 through 2006, you can see the regular account is still well below the income account. At this point you can: 1) choose to receive the annuity account value, 2) begin to receive 5 percent income or 3) allow both accounts to continue to grow (you should be aware that some products will stop compounding the 7 percent after 10 years).

Dan L. Bay is a vice president with Tri Counties Bank and branch manager with Raymond James Financial Services located at 780 Mangrove Ave. in Chico. In 2007, Dan was recognized as one of the top 50 bank financial advisors in the country by Bank Investment Consultant magazine, based on production-to-retail-deposit ratio. Dan has been a member of the Raymond James Advisory Counsel since 2002 and has been awarded to the Leaders Counsel in 2002, 2003, 2005, 2006 and 2007(based on production). Dan can be contacted at 530-898-0415 or toll free 1-866-822-4753. Tri Counties Bank Investment Services is a department of Tri Counties Bank and both are independent of Raymond James Financial Services, Inc. Securities and investment advisory services are offered through Raymond James Financial Services, Inc., Member FINRA/SIPC, an independent broker/dealer, and are: ●NOT FDIC insured ●NOT GUARANTEED by Tri Counties Bank or any other federal government agency. ●Subject to risk and may lose value.

Investors should carefully consider the investment objectives, risks, charges and expenses of variable annuities carefully before investing. The prospectus contains this and other important information. Prospectuses for both the variable annuity contract and the underlying funds are available from my office and should be read carefully before investing.
Variable Annuities are long-term investment alternatives designed for retirement purposes and are subject to market fluctuation, investment risk and possible loss of principal. Withdrawals of taxable amounts are subject to income tax and if made prior to age 59½, may be subject to a 10 percent federal tax penalty.
All guarantees are based on the claims paying ability of the issuing company. Guarantees do not apply to the investment performance or safety of the underlying sub-accounts in the variable annuity. Past performance is no guarantee of future results. The selection of additional protection features, options or riders will result in higher variable annuity charges.