Laddering retirement annuities may be the way to stay out of a financial hole in retirement, according to a new study.
But planners are more cautious about the news, offering mixed reviews on the laddering strategy.
Lifetime income and liquidity are among the benefits that this approach offers, according to Massachusetts Mutual Life Ins. Co., Springfield, Mass., which sponsored the survey.
The process incorporates a portfolio of stocks, bonds and incremental purchases of annuity income benefits over time with goals of producing guaranteed lifetime income, developing more liquidity, and building more long-term wealth.
The results indicated that an income annuity, whether purchased all at once or over time, generally out-performed the stock and bond-only strategy, regardless of market conditions in the periods studied.
The study tested different strategies for managing a retirement income account over 181 time periods between 1965 and 2006, MassMutual says.
It maintains that the investment-only approach, even during strong equity and bond markets, ran out of money in 25% of cases. In contrast, annuity laddering matched the income goal in 100% of the cases.
The study found that a stock-and-bond-only strategy preserved the original deposit at the end of each period tested in just 45% of the cases, while the laddered annuity strategy preserved the original deposit in 93% of cases.
And, for the 45% of the cases in which the stock-and-bond-only strategy preserved the original deposit, the average liquid value of the laddered life strategy was 66% higher.
In every case, according to the study, the laddered annuity strategy matched the income of a life and 20-year certain annuity utilizing 100% of the deposit, and on average more than tripled the original deposit at the end of the period.
Additionally, the average laddered annuity strategy matched income in every case and on average resulted in more than 5 times the original deposit.
The study tested the performance of various asset allocations within a hypothetical $100,000 retirement account tested to produce the same targeted level of annual retirement income over 181 27-year investment periods at monthly starting dates from Jan. 1, 1965 through Jan. 1, 1980.
Planners weighed in with their own views of the laddered annuity approach.
Jeremy Portnoff, a certified financial planner with Portnoff Financial, Westfield, N.J., notes that many people are reluctant to give up control of their money to an insurer and annuitize their funds, preferring instead to take their chances with market fluctuations.
Portnoff says he would like to see an independent study on laddered annuities before he reaches any conclusions on the strategy and “certainly before I’d recommend such a strategy to clients.” He maintains that “a properly diversified portfolio managed with a disciplined long-term strategy should be able to provide an equivalent income stream long term.”
Russell Wild, a financial advisor with Global Portfolios, based in Allentown, Pa., says that “for certain clients, particularly those who are healthy, without dependents, and in no need for a legacy, yes, low-cost fixed annuities make a lot of sense.
“Laddering the annuities makes added sense. That would be true at any time, but especially now with interest rates teetering at near their historical lows. For such clients, a laddered-annuity strategy beats either the no-annuity-all-stock-and-bond strategy, or the let’s-annuitize-it-all-right-now strategy.”
Joseph Alotta, a principal with Open Door Investment Advisors, Inc., Westmont, Ill., notes that most of his clients are well-to-do and have discretion with their spending options and consequently do not have to compromise to get a guaranteed income.
“The annuity ladder strategy is something that I would never recommend. The reason is high fees from insurers and 3%-4% yields that are nothing to write about.”