More advisers are turning toward fixed-income annuities as a new asset when they create retirement plans for their baby boomer clients.
"With the dearth of defined benefit plans, lifetime income has become an asset class unto itself," said Joe DeDomenico, a certified financial planner and president of DeDomenico Wealth Management LLC in North Haven, Conn.
As employers do away with defined benefit plans, retirees don't receive a steady paychecks in retirement, creating an appetite for annuities. Fixed-income annuities are contracts in which an insurer promises to make equal periodic payments, generally for life, in exchange for an upfront investment.
A study released by Massachusetts Mutual Life Insurance Co. in Springfield, which sells annuities, revealed that a retirement-income account with a fixed-income annuity would beat the returns of an account that had only a mix of equities and bonds over a 27-year period. That is, if the annuity were laddered and started out at $100,000, then grew to more than seven times its original value in liquidity by the end of the period.
That answer doesn't come right away to advisers, according to Jerry Golden, president of the income management strategies division at MassMutual. About two years ago, the company worked with advisers to survey their use of income annuities with retirement accounts.
"They understood the advantage of gradually shifting some of the investment assets into annuities, but they were doing it on an ad hoc basis with a lot of paperwork and effort," he said.
Clients can choose a laddering strategy, which allows them to make incremental annuity purchases over time. The process also gives investors the flexibility to decide when they want to make the purchase; they don't have to time the interest environment for an ideal rate for annuity payments.
"If you're buying tranches at different times, you're not trying to time the market," Mr. Golden added.
Rather than working on their own, fixed annuities can work in tandem with other products, such as variable annuities, said Mr. DeDomenico. "A portion of the portfolio should be able to keep pace with inflation and the cost of living," he added.
Because Mr. DeDomenico expects his clients to live another third of their life as retirees, he allocates 25% to 50% of their assets toward a lifetime income stream.
Several new products with greater flexibility give clients access to liquidity when they need it.
"This isn't your grandfather's fixed annuity," Mr. DeDomenico added.
With elderly clients, advisers are finding more situations where the annuities would have worked with a mix of equities and bonds. Take Frances Gardner, a certified financial planner at Ayers Financial Group in Dallas, who has an affluent elderly client in a bind that an immediate annuity could solve.
The client, who is in his 70s, is in a nursing home, and now his heirs are worried that those expenses will devour his assets and leave them with nothing. Ms. Gardner worries that the beneficiaries might put the client into a "rat hole" nursing home to cut the costs and preserve the principal.
Had he purchased an immediate annuity as part of his portfolio of assets, the investor would be able to maintain his lifestyle. The beneficiaries probably wouldn't inherit anything, but it would have been an income that the client couldn't outlive.
As for fixed annuities, they are looking more appealing to clients who are skittish about the stock market and wary of the costs associated with variable products, Ms. Gardner added.
Although advisers and Mr. Golden point out that the planning is key to finding the right annuity for the right situation, they expect fixed annuities to play a larger part in retirement portfolios.
Darla Mercado can be reached at [email protected].
