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Annuities Provide Nourishment In An Income-Starved Environment

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by Susan Rupe

Just as food sustains the body throughout its lifetime, an annuity sustains a client’s savings throughout their retirement.

Just how important an income annuity is to the success of a retirement portfolio was the subject of a recent webinar by Tamiko Toland, director of retirement markets for CANNEX, and sponsored by the National Association for Fixed Annuities.

CANNEX looked at the use of annuity income incorporated into the fixed income allocation, and how that would affect the retirement portfolio sustainability. Among the findings:

» The annuity improves the sustainability of savings throughout retirement.

» Characterizing the annuity as part of the fixed income portfolio can further benefit retirement outcomes, particularly when the portfolio allocation leans more toward the fixed income side.

» The annuity can increase retirement sustainability as well as legacy.

» Equity exposure contributes to both retirement sustainability and legacy.

These findings apply to any form of guaranteed lifetime income, Toland said, whether it comes from an income annuity or guaranteed lifetime withdrawal benefit.

The research looked at whether the retiree would run out of money over the course of retirement. In addition, the research looked at legacy, or how much money would be left over when the retiree dies.

Three different asset allocations were explored in the study.

» Conservative: 30% equity/70% fixed

» Balanced: 60% equity/40% fixed

» Aggressive: 70% equity/30% fixed

The researchers added annuity income in 5% increments starting at 0% and ending at 30%. Researchers looked at a scenario in which the annuity was separate from the remainder of the portfolio and a scenario in which the annuity was included as part of the fixed income allocation.

The percentage of annuity “based on the amount of money put into the annuity on the first day of retirement,” Toland said. “And for the purpose of the study, we used single premium immediate annuities with a 2% inflation adjustment.”

The scenario considers a 65-year-old with $1 million in retirement savings who seeks a starting retirement income of $50,000. The income increases by 2% annually to account for inflation.

The SPIA income amount is based on an average of the top three rates available at the time from a SPIA with a 2% cost-of-living adjustment a company rated at least A++ from AM Best. The rate using a $100,000 premium payment was $410 a month or $4,920 a year.

Conservative

In this scenario, the conservative portfolio has the highest allocation to fixed income, but it also benefits the most from adding the SPIA. Meanwhile, the SPIA reduces the financial legacy because it dedicates some starting assets to the lifetime income stream with no death benefit.

“One of the things that I think is really important is the basic principle that by shifting the annuity into the fixed income allocation, you’re able to fully allocate the rest of that portfolio into equities, as opposed to if it’s outside,” Toland said. “Then it’s almost like doubling up on the fixed income component.”

Balanced

The balanced portfolio has twice the equity allocation of the conservative portfolio. As with the conservative portfolio, adding the SPIA as part of the fixed income allocation gives a noticeable improvement to the portfolio.

Aggressive

Although treating the annuity as part of the fixed income allocation has a noticeable improvement on both the conservative and the balanced portfolios, it has little effect on the aggressive portfolio.

Overall, the findings support the idea that it makes sense to include guaranteed annuity income as part of the fixed income allocation of a retirement portfolio, Toland said. One interesting note, she added, is that much of the effect of this approach shows up in the legacy component and not in the income sustainability component.

She said the findings consider the effect of the annuity purchase on both the strategy’s ability to provide the target income over a lifetime (retirement sustainability quotient, or RSQ) and the size of the legacy.

This is true when simply adding the annuity or counting the annuity as part of the fixed income allocation.

“What I really wanted to focus on is the idea that characterizing the annuity as part of the fixed income portfolio can further benefit outcomes, particularly when the portfolio allocation means towards more towards the fixed income side,” Toland said.

“A lot of good customers for annuities are people who are very conservative-leaning in their investments, and they don’t want to take a lot of chances. But this strategy of including the annuity as part of the fixed income allocation enables the client to be able to have a higher equity allocation. So I think that there’s a general understanding within the industry among people who really understand these products and understand the fundamental dynamics — that not having enough of an equity allocation in a retirement portfolio has its own risks and simply protecting assets alone is not the only thing to consider.

“But protecting assets does allow you to take that risk. And this study is very helpful, I think, in demonstrating how much of an effect that can have in terms of improving outcomes, particularly when clients are conservative in their investments.”

Read the full article, here: https://insurancenewsnet.com/innarticle/annuities-provide-nourishment-in-an-income-starved-environment

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The discussion is not meant to provide any legal, tax, or investment advice with respect to the purchase of an insurance product. A comprehensive evaluation of a consumer’s needs and financial situation should always occur in order to help determine if an insurance product may be appropriate for each unique situation.

Ashley SaundersAnnuities Provide Nourishment In An Income-Starved Environment

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