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Annuities Replacing Bonds for Retirees


U.S. News & World Report’s David Hull isn’t the only one asking “Do You Need Bonds in Retirement?”  CFA Dr. Wade Pfau has been researching whether bonds are needed in retirement anymore and believes that traditional retirement thinking needs to be changed.  Financial professionals have traditionally given advice that investors should use a combination of stocks and bonds while planning for retirement.  The closer they get to retirement, the mix should lean more towards bonds and less towards stocks because bonds are less risky and typically perform well when stocks do not.  Research from the 1950’s showed that there comes a point in life when taking on extra risk is not worthwhile, when the potential rewards would not justify the extra risk later in life.

A big mistake made by many investors is only looking to stocks and bonds to finance their retirement.  Dr. Pfau hopes that his research will change the traditional views of financing retirement because he doesn’t believe that your investments need to include bonds.  He says the best chance you have to meet your lifestyle spending goals and have assets in the case of an emergency such as a health issue is by investing in a combination of fixed annuities and stocks.  He has found that the income needs for financing lifestyle spending goals are best met when investors use single premium immediate annuities (SPIA’s) with stocks.  The author interviewed Dr. Pfau to see how and why he came to these conclusions.

Dr. Pfau analyzed more than 1,000 combinations of SPIA’s, variable annuities, stocks and bonds.  A combination of SPIA’s and stocks consistently gave the best scenarios for maximizing income and maintaining assets.  He equates annuity products as being “bonds with benefits.”  Since your risk is pooled with that of other investors, you are able to get more income for the same investments.  The trade-off is that you don’t get your principal back when the term is up like you would with a bond.  But when your goal is meeting your income needs in retirement, annuities can meet those needs with a guaranteed stream that will last as long as you live.  The traditional financial advice that advisors have come to know and love is actually based on financial growth in the distant past that has been unmatched since and likely won’t be in the future.  It may be time to change some of our reasoning.

If you think a financial retirement plan using single premium immediate annuities and stocks might be right for you, the first thing you need to do is determine your monthly living expenses in retirement.  Your basic living expenses are best covered by your annuity purchase.  If you are close to retirement age or have already retired, delay your annuity as long as possible to get higher payouts in the future.  Remember that while you can’t get your premium back after purchasing a SPIA, you will receive monthly income for life to pay your living expenses.  For younger investors interested in this combination plan, look at annuity rates just to watch how they change and see what you may be able to get in the future.  It’s also a good idea to keep track of what you think your living expenses will be in retirement so that you have a solid idea when you are ready to purchase your SPIA.  And save, save, save for your retirement.

Written by Rachel Summit

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