“Retirees Should Completely Replace Bonds with Annuities”.
Summary of Pfau's Research:
· Bonds cannot replicate the "mortality credit" that annuities offer.
· Portfolios of annuities and equities justify higher total equity allocations.
· Annuities provide more income and less risk than bonds.
The quote is provocative, but the math doesn't lie. Cash flow above 8% annually for retirees leads to better long-term portfolio outcomes unless they have the stomach and the means for a 100% equity portfolio. You can read the full article HERE
The "Golden Age" of annuities is driven by several factors:
Economic
· Relatively high interest rates has led to extremely strong guarantees on annuities
· A shift from defined benefit plans has made retirement income the retirees' responsibility
· "Peak 65" is happening. 4,000,000 people are turning 65 annually and retiring
Mathematical
· ~Half the money is needed to generate $1k/mo of income from an annuity vs a bond
· "Buying income and investing the rest" leads to higher equity exposure without extra risk
Psychological
· Annuities solve retirees' #1 fear - running out of money
People with similar wealth spend 2x more if they're getting annuity income as found in Retirement Income Institute's Whitepaper
Spotlight Client Solution*
8.28% Immediate Income at Age 65
A 65 year old can deposit $100k with Talcott and start receiving $8,280/yr of income for life.
To put that into perspective, the same client would have to earn an average net return of 7.57% in investments to generate $8,280 of income from $100k and have the money last until they're 90 years old. If they live to age 95, that number jumps to 8.17%.
Notable Client Solutions*
10% Guaranteed S&P Annual Cap
Coming soon on April 15th!! The S&P annual cap will be guaranteed at that rate for all 7 years of the surrender schedule.
• 10% guaranteed S&P annual cap
• No rate renewal risk
• 10% liquidity each year
11% Cash Flow at Age 65
A 60 year old would need to earn a net return of 6.94% in the market each year if they wanted to use $100k to generate $11,000/year of income starting at age 65 and have it last until they're 90.
Alternatively, that same 60 year old can get that guaranteed from F&G with their Safe Income Advantage annuity.
*Rates may be subject to premium banding. Products may not be available in all states. Replacement must be suitable and meet all requirements.
At Foundational Income, we strive to bring relevant topics and solutions to your fingertips in a straightforward way. We don’t see the need to keep products nor carriers a mystery. If you’d like to discuss any of this in more detail, give us a call!