Annuities provide boost to investment portfolio: Study

Combining a variable annuity with a guaranteed-minimum-withdrawal benefit in conjunction with a traditional portfolio can help boost income — even in the face of the 2008 decline.
In an Ibbotson Associates Inc. study sponsored by Nationwide Financial Services, the researcher looked at hypothetical investment scenarios going from 1979 to 2009. It compared the returns of a diversified variable annuity with a GMWB, a diversified portfolio similar to a mutual fund, and a combination of the two that replaces a portion of the fixed-income allocation with a variable annuity allocated 70% in equities and 30% in bonds.
Ibbotson found that a person who bought a $1 million variable annuity with a 5% guaranteed-withdrawal benefit in 1979 and held it for 30 years would have $168,249 by 2009. Moreover, the benefit base would have hit $3.36 million, and the remaining contract value would have been $1.62 million.
Paired with a moderately conservative portfolio with 40% in equities and 60% in fixed income, the potential income seems to be higher, assuming a 5% withdrawal rate. In this case, the $1 million allocation shifts so that 40% of the money is in equities, 45% is in fixed income and 15% is in the variable annuity.
The annuity has a 3% fee, while the mutual funds have a 2% fee for the example.
Over the course of 30 years, starting at 1979, the assets in the 40/60 portfolio would hit $2.04 million, and total income would be $3.22 million, with an average income return of 2.8%.
On the other hand, with the annuity strategy, total income would add up to $3.47 million, and the asset balance would be slightly higher at $2.04 million, with an average income return of 3.2%.
Both strategies withstood steep losses in 2008 when the market declined, with income return declining by 19.4% for the portfolio and 18.4% for the combination strategy, according to the study.
Though the strategy of combining the annuity with the investment portfolio appears to be beneficial, the outlook may not be as good when considering investors who may have a time horizon that’s less than 30 years.
Further, the study doesn’t consider the possibility that the insurer may default on the annuity contracts, but it does note that the likelihood of that is low.