Immediate annuity in retiree’s portfolio increases amount heirs receive
By HUMBERTO CRUZ
Tribune Media Services
Do you want to spend the most you can in retirement? Or would you rather pass something on to your kids?
Maybe you can do both.
One way, according to the actuarial firm Milliman Inc. in Seattle, is to include an immediate fixed income annuity in your retirement portfolio. Although the finding is counterintuitive, including the annuity increases the amount retirees can pass on to our heirs on average, compared with putting all their money in a portfolio of mutual funds, a study by Milliman indicates.
An immediate annuity is an insurance product that, in return for a lump-sum premium, guarantees an income for life. Many studies have shown that income annuities on average provide higher lifetime income than we can get on our own from high-quality fixed-income investments.
But with income annuities, we give up or at least seriously limit access to our principal. Unless we opt for “period certain” or minimum guaranteed payments, our heirs get nothing when we die. Many people shy away from immediate annuities because they don’t want to disinherit their children.
So, how can including an immediate annuity in a retiree’s portfolio actually increase the amount heirs receive?
“It was a bit surprising, but the annuity provided a higher bequest on average because the mutual funds are largely left untapped in the early years,” said Tim Hill, a Milliman consulting actuary and principal. As a result, the mutual funds can grow to bigger amounts on average than if retirees make regular withdrawals to generate income.
The Milliman study was commissioned by NAVA, formerly the National Association for Variable Annuities and now the Association for Insured Retirement Solutions. NAVA’s membership includes insurance companies that sell annuities.
Study findings depend heavily on assumptions. In one case study, a 65-year-old couple with $500,000 in savings sought $20,000 in annual income, increasing by 2.5 percent a year for inflation, to supplement Social Security benefits. They could get an immediate annuity paying $6,739 a year for every $100,000 of premium until the second spouse died, assumed to happen on average in 31 years.
Under those assumptions, the best way to satisfy income and bequest goals was to use $300,000 to buy an immediate annuity that paid $20,200-plus a year for life and to split the other $200,000 in a 60-40 stock-bond fund mix.
Under other scenarios and investing more aggressively, the couple could have increased the bequest to as much as $1,338,000 with an annuity, compared with $945,000 without one.
Of course, if the couple died right after spending $300,000 for this annuity with no “period certain” payments, the heirs would receive just the $200,000 in the mutual funds. If there is any “rule of thumb” I derive from this study, it is to have enough sources of predictable income — whether from annuities or other sources — to cover expenses at least the first few years in retirement, without having to depend on uncertain investment returns
Annuity
