Barrons gives us a good overview article recently highlighting the top 50 annuities in the marketplace. One of the things I found revealing was how drastically the industry has changed over the last year. We’ve seen benefits contract, fees move up, and payouts decrease.
Why is this?
Quite simply, the insurance and annuity industry must generate returns in the same investment climate you do. They make long term future promises to their contract holders, and have to invest the premiums in a near 0 % rate environment.
“We’ve seen investment options in variable annuities diminished, guarantees brought down substantially and fees going up,” says Nigel Dally, an analyst at Morgan Stanley. “Protracted low interest rates and high volatility in the stock market have made it far more expensive for annuity companies to support their products.”
With fixed and immediate annuities, the annuity issuers offer guarantees, then rely on their investment managers to produce the returns promised and also to produce a corporate profit. They shoulder the market risk so you don’t have to.
But when they have no where to turn for safer, higher yield options, they necessarily must lower the payout benefits offered.
Here’s the table from the article.
What’s your best strategy?
Our principal approach to retirement planning remains true now as before: cover your baseline income needs with guaranteed income, and optimize the remainder of your portfolio with the difference. The optimization may mean allocating to riskier categories like stocks, when traditional wisdom would have you getting more and more conservative. However with your bases covered, you can afford to do so, and may come out better in the long run.
Barrons summarizes this theory this way:
When used properly, annuities can remove concerns about longevity, and lower overall investment risk. This can make investors more comfortable allocating assets to riskier investments, ultimately increasing overall returns.
You can see the article here: