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May 03, 2010 at 08:00 PM
There has been more attention than ever centered around annuities, prompted by discussions at the federal level about the benefits of adding an annuity to individual retirement portfolios. At the heart of the discussion is the fact that consumers need to protect themselves from outliving their savings by adding a reliable, guaranteed retirement income source to their retirement funds — retirement funds that have been diminished by the decline of pension plans and by the recent financial crisis. This broad recognition of a need to establish a “personal pension” brings to light the value of immediate annuities as part of the solution to the retirement savings risk that millions of families are facing.
Before 2008, the addition of an income annuity to a retirement plan started to become a standard part of planning decisions because the guaranteed paycheck for life provided consumers with a necessary guaranteed income source. As a result of this awareness, sales of income annuities industrywide grew significantly — up more than 50 percent between 2005 and 2008.
Then the “Great Recession” took hold. The stock market declined by more than half its value, and the average 401(k) and IRA value plummeted, negatively affecting retirement plans. For many retirement-aged people who had less time to recoup their losses, it hinted at disaster. In fact, the market meltdown caused the reduction of retirement nest eggs by up to 40 percent in many cases, meaning that a $500,000 retirement nest egg could be worth as little as $300,000 and would generate significantly less income in retirement. While the markets have somewhat recovered, many are still down 25 percent or more.
Retirees need to find a way to replace the loss, maximize the rest of their nest egg, and ensure that retirement savings last a lifetime. The immediate annuity offers a time-tested solution. By using income annuities as part of their retirement income portfolio, people found a way to recoup the lifetime retirement income stream they would have had with a $500,000 nest egg.
How is that possible? A 2007 academic study, “Rational Decumulation,” conducted by professors at the Wharton School and Brigham Young University, demonstrated that by using income annuities, consumers could generate a stream of secure lifetime retirement income for 25 to 40 percent less money than it would cost to create an equally secure lifetime income stream using a traditional portfolio of stocks, bonds, and cash. With the benefits of risk pooling available only from life insurers, income annuities help replace the retirement income stream lost when funding income needs with only stocks, bonds, and cash. In other words, that $300,000 portfolio can still provide lifetime income equal to the income that the $500,000 portfolio of stocks, bonds, and cash used to generate.
