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Portfolio > Portfolio Construction

More Annuities Used in Income Portfolios

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At a time when the market downturn has caused some advisors to question their ability to construct adequate retirement income portfolios, advisors are increasingly turning to annuities to help cover their clients’ basic needs in retirement.

As clients’ portfolios have diminished in tandem with the markets–in some cases substantially–advisors are increasingly using annuities with guarantees to address clients’ retirement income floor–the cushion that will provide ample money for the basic necessities in retirement. Many advisors are now “looking at annuities or some type of income guarantee, an immediate annuity or variable annuity,” says Dennis Gallant, president of GDC Research in Sherborn, Massachusetts, who recently penned a report with Practical Perspectives called Examining Best Practices in Constructing Retirement Income Portfolios. The research found that of the advisors polled, 41% agreed that they are now more open to using annuities. Providing a guarantee for retirement income portfolios “is part of the solution, not the entire solution,” Gallant says.

Once advisors have addressed the retirement income floor via a guaranteed product, they must then address how to provide clients with the extra cash that will satisfy their “wants” in retirement, he says. Advisors must still tackle the inflation and longevity hurdles by investing in the equity markets, Gallant says.

Gallant’s research found that, understandably, the volatility in the markets has forced advisors to make changes in their asset allocations.

The study found that while most advisors say they have not made significant changes to how they construct retirement income portfolios, many advisors have made some changes. “The most important steps they have taken in the past year are shifting the portfolio to a more conservative allocation, increasing the use of annuities, and increasing use of more conservative investments such as cash or fixed income securities,” the study says. A significant portion of advisors, the report says, define the most important step they have taken in response to market volatility as inaction–namely, staying the course without making major changes to allocations or investments.

The study also notes that many advisors have chosen to reduce exposure to U.S. and international equities, while increasing allocations to cash and U.S. fixed income investments. The research found that there has been “only modest change in the use of non-traditional strategies such as real estate, commodities, or hedging strategies, or other types of alternative investments.”


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