For Annuities, It’s All About Timing

Purchasing fixed-income annuities gradually or all at once can build more long-term wealth and liquidity than other retirement income strategies, claims a study from MassMutual.

The study tested four strategies for managing a retirement income account over 181 time periods between 1965 and 2006. It found that the three strategies involving an income annuity, whether purchased all at once or over time, generally out-performed the stock and bond-only strategy, regardless of market conditions during the periods studied, according to a press release.

One portfolio incorporated stocks, bonds, and incremental purchases of annuity income benefits over timea process called retirement annuity laddering. While the study does not prove that the annuity laddering method is more effective than purchasing fixed-income annuities as a lump-sum, MassMutual finds the gradual purchase is an effective method.

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Even during strong equity and bond markets, the investment-only approach ran out of money in 25% of the cases. In contrast, the strategy of laddering into a life annuity matched the income goal in all of the cases tested, the study says.

The stock-and-bond-only strategy preserved the original deposit at the end of each period tested in 45% of the cases, while the laddered life annuity strategy preserved the original deposit in 93%, MassMutual says.

“Although one might expect retirement annuity laddering to provide more income security, it’s surprising to advisers that the strategy also provided more liquidity and built more wealth at the same time,’ said Jerry Golden, president of MassMutual’s Income Management Strategies Division, in a press release.

Using the Ladder

While purchasing a fixed-income annuity is effective, deciding when to purchase the annuity—all at once of over time—can be crucial, the study attests.

Increasing the purchase of fixed-income annuities over the years can be beneficial, says MassMutual. The report says annuity laddering adds flexibility to adjust annuity purchases as a client’s financial circumstances change, and also helps smooth out the ups and downs in the early years of retirement.

The critic might pose the question: What if the retiree dies early? These results are based assuming that the savings would be used for personal retirement income, but the study also addresses a case with a beneficiary protection benefit separately.

Just Right

The study concludes that the foundation of income allocation should be built on the three basic asset classes of equities, bonds, and fixed-income annuities (whether purchased gradually or all at once).

Advisers are tasked with choosing the right mix of initial classes, rebalancing the mix as clients experience change in situation and goals. Also, advisers must time the purchase of annuities just right, MassMutual says.

The Study of Retirement Income Account Allocations Among Equities, Bonds and Fixed Income Annuities is part of a series of studies by MassMutual about retirement income. To obtain a copy, e-mail or visit