Study Shows Savings Growth Potential of Fixed Income Annuities

Incorporating a fixed income annuity in a retirement income account yields greater long-term wealth for an investor, and more income security, than a portfolio of equity and bond investments alone, according to a recent study.

The new study from MassMutual Financial Group indicates also suggests retirees can build more wealth, address purchase rate risk, and enjoy greater flexibility by making incremental purchases of annuity income benefits with assets transferred from mutual fund model portfolios over time – a process called “annuity laddering.” Gradually increasing the guaranteed income component through annual purchases of additional fixed income annuities can:

  • Help smooth out rate spikes or dips in the early years of retirement by periodic income purchases,
  • Enable retirees to purchase fixed income annuities at increasingly older ages with the possibility of increased income payout rates (income annuities often pay out higher amounts at older ages),
  • Provide them with flexibility to adjust their income purchases should their financial circumstances change.

“By including fixed income annuities in a retirement income account, retirees may achieve greater growth potential while also addressing their desire to avoid running out of money in retirement and to leave a legacy for their spouses or children,” said Jerry Golden, President of MassMutual’s Income Management Strategies Division, a unit of the Retirement Income Group of Massachusetts Mutual Life Insurance Company (MassMutual), in a press release about the study.

The MassMutual study evaluated various asset allocations within a hypothetical $100,000 retirement income account tested to produce the same targeted level of annual retirement income (initially, $10,597) from January 1, 1980 through December 31, 2006. The retirement income targets were set to equal the relatively risk-free alternative of investing in a series of 10-year U.S. Treasuries over the 27-year study period.

At the end of the 27-year period of historical returns (1980 through 2006):

  • Account A, which had no fixed income annuity component and was made up of U.S. equities (50%) and U.S. bonds (50%), had a liquid value (the current market value invested in equities and bonds) of $489,346, nearly five times the original $100,000 deposit, at the end of the 27-year study period.
  • Account B, which was made up of the same 50/50 allocation as Account A except that, at the start, 33.3% of the account (all from the bond portion of the investment portfolio) was used to purchase a life-only fixed income annuity, had a liquid value of $667,688, almost seven times the original deposit, at the end of the 27-year study period.
  • Account C, made up of U.S. equities (50%), U.S. bonds (30%), as well as an initial purchase of a life-only fixed income annuity (20%) with additional fixed income annuity purchases in the second through seventh years, had a liquid value of $735,292, more than seven times the original deposit, at the end of the 27-year study period.
  • Account D has the same initial asset allocation as Account C; however, the payout method for all fixed income annuity purchases is life with 20 years certain (providing protection for the beneficiaries in the event of an early death of the investor), and generated more than five times the original deposit in liquid value ($546,200) at the end of the 27-year study period.

The report is available here.