Ibbotson Evaluates Annuities and the Value of a GMWB

Morningstar’s Ibbotson Associates has made several important research studies available to advisors.

One study highlighted at the recent NAVA ’08 Marketing Conference found that adding a variable annuity with a lifetime guaranteed minimum withdrawal benefit (GMWB) to a traditional stock and bond retirement portfolio can increase income while decreasing income risk. The study was co-sponsored by Nationwide and began circulating in October 2007.

A presentation on the study made during the recent NAVA event, and one being made with Merrill Lynch financial advisors as part of that firm’s risk-management events, highlights the recent research conducted by Ibbotson (part of Morningstar) in cooperation with Nationwide.

This work shows that while a conservative mutual fund portfolio (20 percent equities/80 percent bonds) could provide of about $2.4 million of retirement income and $1.7 million of investable assets after 28 years of retirement, this same portfolio with a 20-percent allocation in a moderately aggressive variable annuity (80 percent equities/20 percent bonds) could produce some $2.7 million in retirement income and $1.9 million in investable assets.

Eric Henderson, senior vice president of Nationwide, says the income (rather than accumulation) should become the central to the industry’s mindset. Consumers believe that what really matters is the income stream, he says, and are concerned with income risk – which represents the year-to-year fluctuation, and they are increasingly willing to pay for protection against living too long, for instance.