Advisors Divided Over Value Of Retirement Annuity Laddering

Alotta raises the possibility of systematic withdrawal from a mutual fund or a series of mutual funds. He says that a lot of the Monte Carlo projections do not account for the fact that in a market panic, people cut back on discretionary spending and adjust their lives until the stock market rebounds.

A structured annuity ladder would result in "guaranteed income" but also "guaranteed expense," says Wayne B. Titus III, a financial advisor with AMDG Business Advisory Services, P.L.C., Plymouth, Mich.

"The thought of an annuity 'ladder' seems ludicrous to me. All you're doing is setting up the exact same concept of a bond ladder," he says. "If the objective is to 'preserve' and not 'grow' or to keep up with inflation, then a bond ladder of governmental bonds would be a much less expensive approach.

"If you need to 'add' performance in order to go beyond asset preservation, then I think you can accomplish, with much less expense, and with greater flexibility, a fixed income governmental bond ladder with a portion allocated to well diversified equity portion that would provide a much better option." Titus explains.

John Belluardo, president of Stewardship Financial Services, Tarrytown, N.Y., says, "I believe a diversified portfolio of no-load mutual funds that is rebalanced regularly is superior to any annuity strategy. I use this approach to provide lifetime retirement funding for my clients."

And, F. John Deyeso, a financial advisor with FinancialFilosophy, New York, says the issue of a strategy of laddered annuities is not a "cut and dry answer."

Deyeso says laddered annuities are a "great concept and in theory work well to insure lifetime income." However, he continues, there are offsets to those benefits including locking in an income stream that may not be sufficient over time, a principal that is gone and a "big concern" over fees and inflation protection.

For instance, he says most inflation riders use the CPI Index, which he notes "as many on the East Coast can attest is not really accurate to the true increase in the cost of living."

Deyeso says he believes in the use of annuities but in a phased-in approach starting in the early to mid-70s and adding on that base as the client gets older. A phased-in approach, he says, allows for certain things: maximizing liquidity in case of medical emergencies; increasing the payouts for annuities as clients get older; and allowing the client to balance the flexibility of having cash with the risk of outliving their income.

He says he foresees better annuity options and lower fees as boomers start to retire, a change that will make "annuities a more attractive option."

Annuities have "their time and place," but are overused, says Adrian Eddleman, founder and chief investment officer of Eddleman & Eddleman, Jackson, Tenn. He says that while he has not read the Mass Mutual study, in general, given the exact same rates of return, the annuity will produce less combined income and capital appreciation due to the added cost.

If a different approach is taken and 2 different rates of return are used–1 for the return of a stock and bond mix and 1 for annuities, less fees–then the question becomes whether a client can endure volatility if the stock/bond return is less than the annuity less fees, he explains.

Jim Davis, a financial advisor with Partnership Financial, Grove City, Ohio, and a member of the Alliance of Cambridge Advisors, says the issue of outliving income in retirement comes up often with clients but while bond ladders are used, annuities in ladders are not. What is used, he continues, are stripped Treasuries, which are securities that separate the interest and principal repayment cash flows.

Although annuity expenses have come down, stripped Treasuries are used because the concern with a bond ladder is safety and not yield. "Safety always trumps yield," he says.

Ladders are typically constructed about 5 years before retirement and go out about 12 years, he adds. The way it works, Davis explains, is to use either the bond ladder money or equities money to pay for living expenses, depending on which one performs better. If equities are up, any bond money is used to add rungs to the upper end of the bond ladder, he explains.

Additionally, he says, his firm builds bond ladders in IRAs for tax efficiency, a strategy, which Davis maintains, does not work with an annuity.

Georgia Bruggerman, a financial advisor with Meridian Financial Advisors, Holliston, Mass., believes that bonds or a combination of bonds and preferred stocks can accomplish the same thing as an annuity ladder.

"With the current financial crisis there are corporate bonds out there with very attractive yields which can be laddered out 10 years," she says. Additionally, when rates start rising again, CD rates will also increase, and those products have no call, management fee, loads or commissions, she adds. Preferred securities that are callable in 5 years are currently yielding 8% or more.