Incorporating a fixed income annuity into a retirement income account yields greater long-term wealth and income security for boomer investors than does a portfolio comprising equity and bond investments alone, even in an “up” market. That’s a key finding of a new report from MassMutual Financial Group, Springfield, Mass.

The study, which tested the performance of various asset allocations within a hypothetical retirement account over a 27-year investment period from Jan. 1, 1980 to Dec. 31, 2006, could have “substantial implications for the retirement planning of millions of retiring baby boomers” and the financial professionals who advise them.

The study shows that retirement income accounts may benefit from using three asset classes–equities, bonds, and fixed income annuities–in designing a retirement income plan. The study also suggests that retirees can build more wealth, address purchase rate risk, and enjoy greater flexibility by making incremental purchases of annuity income benefits with assets transferred from mutual fund model portfolios over time, a process called “annuity laddering.”

“Income annuities can create greater cash flow for retirees while also lessening the risk of outliving their savings,” said Jerry Golden, President of MassMutual’s Income Management Strategies Division, a unit of the company’s Retirement Income Group.

“By including fixed income annuities in a retirement income account, retirees may achieve greater growth potential while also addressing their desire to avoid running out of money in retirement and to leave a legacy for their spouses or children,” he adds.

The MassMutual study evaluates results of various asset allocations within a hypothetical $100,000 retirement income account tested to produce the same targeted level of annual retirement income (initially, $10,597) for each hypothetical account from Jan. 1, 1980 through Dec. 31, 2006. The retirement income targets were set to equal the relatively risk free alternative of investing in a series of 10-year U.S. Treasuries over the 27-year study period.

MassMutual chose a 27-year period because it represents approximately the length of time that a “prudent person,” retiring today at age 65, should consider for purposes of planning a lifetime income stream. It also represents a period of generally favorable performance of the U.S. equity and bond markets.

The asset allocations were tested in head-to-head comparisons. In summary, at the end of the 27-year period of historical returns (1980 through 2006):

Account A, which had no fixed income annuity component and was made up of U.S. equities (50%) and U.S. bonds (50%), had a liquid value (the current market value invested in equities and bonds) of $489,346, nearly 5 times the original $100,000 deposit, at the end of the 27-year study period.

Account B, which comprised the same 50/50 allocation as Account A except that, at the start, 33.3% of the account (all from the bond portion of the investment portfolio) was used to purchase a life-only fixed income annuity, had a liquid value of $667,688, almost 7 times the original deposit, at the end of the 27-year period.

Account C, made up of U.S. equities (50%), U.S. bonds (30%) and an initial purchase of a life-only fixed income annuity (20%) with additional fixed income annuity purchases in the second through seventh years, had a liquid value of $735,292, more than 7 times the original deposit, at the end of the 27-year study period.

Account D has the same initial asset allocation as Account C; however, the payout method for all fixed income annuity purchases is life with 20 years certain (thereby providing protection for the beneficiaries in the event of an early death of the investor). The account generated more than 5 times the original deposit in liquid value ($546,200) at the end of the 27-year study period.

Golden said that while accounts B, C, and D are bolstered by the use of a fixed income annuity, the decision of when to purchase the income annuity–all at once or gradually over time–can be crucial in certain market conditions and can vary based on an investor’s comfort level. Gradually increasing the guaranteed income component through annual purchases of additional fixed income annuities can:

??Help smooth out rate spikes or dips in the early years of retirement by periodic income purchases.

???nable retirees to purchase fixed income annuities at increasingly older ages with the possibility of increased income payout rates (income annuities often pay out higher amounts at older ages.)

??Provide them with flexibility to adjust their income purchases should their financial circumstances change.

“Stocks, bonds and fixed income annuities working together can help create a plan that delivers a combination of lifetime income security and asset growth potential,” says Golden. “Advisors will play a critical role by helping clients choose and continually adjust the mix of classes, guiding the timing of periodic purchases of fixed income annuities, and addressing their client’s beneficiary needs.”