Two analysts who are skeptical about broad retiree use of income annuities have shown when the products might beat ordinary portfolios of stocks, bonds and cash.
The analysts, Jack De Jong and John Robinson, contend in a new working paper that bare portfolios, combined with static cash distribution strategies, will outperform income annuities in about 90% or more of the investment market scenarios produced by their simulation system.
Cutting cash distributions when conditions are poor will help bare portfolios perform even better, De Jong and Robinson predict.
Given that only harsh, long-lasting bear markets are likely to deplete portfolios, and that annuitizing can lead to a significant wealth sacrifice, "we conclude that the consumer decision to retain control over the spending portfolio instead of purchasing a SPIA seems decidedly rational," the analysts write.
But the analysts also suggest, in exhibits showing the results of their forecasting efforts, that single-premium immediate annuities could help holders keep their income flow and nest eggs in some market scenarios that would wipe out the nest eggs of retirees without SPIAs.
Mortality credits could help single SPIA buyers get a positive return on investing around age 90, and they could help couples with joint-life SPIAs break even around age 91 or 92, the analysts report.
What It Means
Clients who care more about maximizing income in 90% of market scenarios may continue to prefer to hold their nest eggs outside of annuities.
Clients who are more afraid of going broke in extreme bear markets than in living well in other scenarios may continue to want to hear about SPIAs.
Income Annuities
Annuity contracts are financial arrangements that can convert a pot of cash into a stream of income payments.
U.S. life insurers design many annuity contracts as vehicles for accumulating assets. The focus in the design of these products is more on helping the holder accumulate assets inside of an annuity than in generating income.
An income annuity contract is an annuity designed to produce income.
Some consumers who have retired and need spending money may simply withdraw cash from a bare investment portfolio or accumulation-oriented annuity.
Other consumers who need income use their retirement savings to make one big payment for a single-premium immediate annuity.
A SPIA is an annuity contract designed in such a way that it can convert one large lump-sum payment into an income stream that can last a lifetime.
De Jong and Robinson
Jack De Jong is on the faculty of Seattle Pacific University.
Robinson is a financial advisor based in Honolulu and the co-founder of Nest Egg Guru, a product that financial advisors can use to help clients test savings and spending strategies.
De Jong and Robinson have presented their paper as a response to papers by researchers, such as David Blanchett and Michael Finke, who have suggested that retirees should be making more use of SPIAs to maximize retirement spending capacity and retirement nest egg security.
