Many people consider a bond/equity mix to be the standard of retirement income. Unfortunately for them, bonds are becoming less desirable for many reasons. Increases in inflation and interest rates are not good for bond prices. Add to that the fact that equities are at all-time highs and corrections are likely in the near future and the negatives are stacked against bonds right now. Indexed annuities with guaranteed minimum income benefits are a great alternative to bonds. They are safer, according to new research by retirement income professor Dr. Wade Pfau. This information comes from Annuity News’ Chris McDonald in the article “IAs As An Alternative To Bonds.”
Dr. Pfau’s indexed annuity research was written about in his new white paper, “Mitigating the Four Major Risks of Sustainable Inflation-Adjusted Retirement Income,” co-authored by Rex Voegtlin. They compared four different retirement income products against four major risks in retirement to determine which product is best. Indexed annuities with 30-year inflation-adjusted income riders performed better in their research than bonds, variable annuities and single-premium immediate annuities. For the research, they assumed that the inflation rate would be 4%. The indexed annuities with inflation riders were found to offer Baby Boomers more flexibility and the best inflation-adjusted income. Those Boomers who have been wary of giving up the control of a large part of their retirement savings in a more traditional annuity would be well suited with these newer indexed annuities.
The white paper authors used four different risk factors to determine the effectiveness of the bonds and different types of annuities. Longevity risk, inflation risk, equity sequence of returns, and bond-yield sequence of returns were the risks. They expect inflation to be a big issue for people looking to retire soon. Although single premium immediate annuities did solve three of the risk factors, new state of the art indexed annuities were the only product to solve all four. This included the sequence of inflation risk. Although their research invested 100% of the portfolio into each product for the purpose of the study, it is not advised to do this in real life. But by using part of your portfolio to purchase an indexed annuity with a guaranteed minimum income inflation rider, you are putting yourself in a good financial position.
These indexed annuities can be used with equities and bonds if you aren’t concerned about their inherent risk with rising interest rates and inflation. Take those factors and an overpriced stock market into consideration and you see the true power of indexed annuities. Many of these products allow you to access your money when you have an emergency. They also adjust your account for inflation for up to 30 years, using the consumer price index. You have the ability to stop and start your income stream multiple times. New indexed annuities do not cap your earnings and will remain risk-pooled. Indexed annuities with guaranteed minimum income benefits might be the best bond alternative with today’s economic conditions.
Written by Rachel Summit