Do you know that the greatest number of consecutive days the Dow has ended with a gain is only 13? Since 1950 the S&P 500 has been up about 53% of the time and down around 47%; up heads, down tails.
We are not saying that your retirement has only a slightly better chance than a coin flip of success; but we are saying that with any investment in securities, there is a degree of risk. It is also obvious that with the markets, what goes up does come down – and fairly regularly even on upward trends. Unfortunately, this regular volatility makes it difficult for many retirees to sleep at night knowing that their retirement lifestyle is dependent upon the success of the market’s good days overwhelming the bad ones which is far from **guaranteed – especially in a retiree’s lifetime! [continued below video…]
Guarantees, including optional benefits, are backed by the claims-paying ability of the issuer, and may contain limitations, including surrender charges, which may affect policy values. During this segment, Dick and Eric are referring to Fixed Annuities unless otherwise specified.
Consequently, we see retirees turning to less risky and less volatile options when they are near or entering retirement years. Historically, the experts have said that stocks and bonds give you your best chance for success in your golden years. Not so lately, according to a recent study by Dr. Wade Pfau which states your best chance for success in retirement is actually a blend of stocks and annuities!
So whether or not you are wanting to improve your chances for success in retirement or you are just looking to take some of your stock market earnings/winnings and “retain your gains”, it may be the perfect time to check out what an annuity can do for you.
Check out this US News article on the annuity versus bonds discussion.
New research considers ditching bonds in favor of stocks and annuities.
Traditional financial advice suggests you invest in a mix of stocks and bonds in planning for your retirement, and shift the mix more towards bonds as you age. The reason for this advice is that bonds tend to be less risky and have lower volatility than stocks, and are often counter-cyclical to equities. When stocks don’t perform well, bonds do, and vice versa.
Research in the 1950s by Harry Markowitz describes an “efficient frontier” to diversifying and trading risk for rewards. Basically, his research showed that there was a point at which you did not need to take on additional risk because the rewards you received for doing so did not justify taking on that extra risk. This research led to modern portfolio theory and much of the well-worn advice that financial planners trot out regarding investing in stocks and bonds.
Unfortunately, one mistake investors often make as they plan for retirement is failing to look beyond stocks and bonds, and take into account other sources of income when they make their investment allocations. However, new research by Dr. Wade Pfau, CFA, threatens to turn traditional advice about stock/bond allocations in retirement onto its head.
Dr. Pfau notes that people have two main goals in retirement: supporting lifestyle spending goals, or at least minimum spending needs, and maintaining a sufficient cushion of assets in reserve for unexpected expenses such as health issues, boomerang kids, and emergency repairs. Since most people do not have enough retirement savings to comfortably meet both goals, they have to make a trade-off between one or the other—more income or more assets.
While he doesn’t claim to allow people to have their cake and eat it too, Pfau suggests that it is possible to get more income in that tradeoff. His research suggests that, instead of investing exclusively in stock and bond allocations, people will be better off in investing in a combination of stocks and fixed annuities while avoiding bonds altogether.
You read that correctly. His research suggests not investing in bonds at all. The paper shows that people have their income spending needs met more fully by buying single premium immediate annuities (SPIAs) and then investing the remaining assets in stocks.
I was intrigued. My grandparents used to buy me Series EE savings bonds for my birthday as a way to save and invest. I had to cash them in to pay for repairs when my car managed to find its way into Mr. Kimble’s passenger side door in high school, but boy, was I glad I had them. Surely bonds were part of any well-diversified portfolio, weren’t they?
Fortunately, Dr. Pfau was kind enough to spare me some time for an interview. Some highlights:
Dr. Pfau conducted a Monte Carlo analysis of 1,001 combinations of stocks, bonds, SPIAs, and variable annuities#. In every case, the best outcomes for maximizing income and remaining assets came from an allocation of stocks and SPIAs. Based on these findings, Dr. Pfau asserts, “there is no need for retirees to hold bonds.”
Annuities are like bonds with benefits. With a bond, you’re going to receive a set amount of income payments over a fixed period of time and then receive your principal back. With a SPIA, you’ll get a given amount of income payments for the rest of your life, but you get no principal back. Annuity providers use actuarial data to determine how much to pay you because a given percentage of people die each year. If you’re a 65-year-old male, then, on average, you’ll live another 17 years. So, the annuity provider can make payments as if you’d live another 17 years. However, some people will die earlier, and some will die later. If you die later, you have beaten the house and you get more money, but if you die earlier, the house wins. Because of this pooling of risks, annuities can pay a higher percentage return, and the trade-off is that you don’t get the money back at the end. If you’re looking to meet income needs, then this is a great way to meet your goals because you can get more income for the same dollar. [Read more from US News…]
Using OutCome Based Planning™ for Your Retirement
"The Annuity Guys will never call you unless you request our assistance". When you are ready for specialized help we will be available to assist you.. We practice and recommend a "Holistic - OutCome Based Planning™ process when considering annuities." This approach has the effect of balancing your overall portfolio with annuities so you can meet your retirement objectives by "first identifying the least amount of your investments or savings that should be considered for annuities." OutCome Based Planning™ analyzes and models multiple outcomes so you can clearly identify your best income and growth opportunities.
"Working with an Experienced Fiduciary Financial Planner can help you Avoid a Trial & Error or Risk Based Retirement"
If you have done a little internet research, you are probably aware that you can choose from hundreds of annuity advisors/salespeople who will try to convincingly promise you that they have the best annuities and advanced strategies for all of your money. Indeed, there are many advisors who claim to have "that one best solution, best annuity or best strategy; this, however, is not the way we approach or recommend that you do retirement and income planning" since we believe that there are many good solutions for you to consider. Our recommended process is directed towards looking at several plausible financial strategies with different successful outcomes based on your financial situation. This process helps you to compare and select one of the best solutions "that you are most comfortable with.
This type of approach does take considerably more time, effort and analysis which will show you mathematically the successful possibilities by comparing various outcomes rather than trying to sell or convince you of that "so-called one best solution." Clients frequently tell us that this process removes some of the confusion and emotion to help them objectively identify a better retirement plan; rather than just ending up with the most convincing salesperson or advisor.
When requesting help you can be assured of working with an experienced Annuity Guys' Retirement Planner who is an independent, licensed insurance agent and (also a securities licensed fiduciary financial planner) who has access to many different companies and annuities in helping you choose the best annuities using a holistic-outcome based planning approach. We consider the high quality advisor recommendations we make to our website visitors as a direct reflection back on us.