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Municipal Bonds vs. Immediate Annuities for Income in Retirement


New York Life has analyzed the income-generating potential of many financial instruments in comparison with fixed income annuities. Municipal bonds (munis) offer relative safety, as do income annuities from highly-rated insurers. Munis also offer some tax advantages. Even considering the tax advantages, however, we believe that income annuities can be more efficient than munis in generating income.

First, income annuities receive favorable tax treatment. A portion of each payment is considered a return of principal and is excluded from taxation. This is referred to as the "exclusion ratio."

Second, income annuities can offer more income than municipal bonds because they incorporate the benefit of risk pooling. The payout from an income annuity is a combination of investment earnings, return of principal, and mortality credits, which is why they usually offer more income than other investments. A recent study by two Wharton academics estimated that an income annuity can generate the same income as a traditional portfolio of stocks and bonds with 25% to 40% less money.*

Third, with respect to munis, you can't draw down the principal without the risk of running out of income if you live too long. While income annuities have less liquidity than munis, they provide guarantees for life (based on the claims-paying ability of the issuing company).

Finally, an income annuity eliminates re-investment risk. If you purchase a 15-year municipal bond and then live longer than 15 years, you will have to purchase another bond. If interest rates are lower at that time, you will generate less income. There is no guarantee that you will maintain the income level you lock in today. With an income annuity, your income level is guaranteed for as long as you live. You never have to worry about changes in interest rates.

While municipal bonds offer tax advantages and are a safe way to accumulate assets when you're trying to generate income in retirement, we believe -- and the Wharton findings confirm -- that an income annuity is a more efficient use of funds.

*Visit insr.wharton.upenn.edu/babbel/ to view the study "Investing Your Lump Sum at Retirement," by Dr. David Babbel and Dr. Craig Merrill, co-sponsored by New York Life Insurance Company.

Michael G. Gallo is senior vice president of Retirement Income in the Guaranteed Lifetime Income Department for New York Life Insurance Company. He is responsible for overseeing the income annuity business. Mr. Gallo joined the company as an actuarial trainee in 1976. After serving in varied capacities throughout the company, he was elected vice president and chief administrative officer in the individual operations area. In January 1994, he was named senior vice president in charge of the Northeastern Zone. In 1995, he became senior vice president in charge of the Individual Life Department. In 2005, he was appointed chief of staff to the chief operating officer of Life and Annuity and U.S. Insurance Operations. He assumed his current role in March of 2007.


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