FIA could boost chances of sustaining lifetime income

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New research shows that combining a fixed indexed annuity with traditional retirement portfolio strategies significantly improves the chances of creating sustainable income throughout retirement.

Security Benefit Corp., a Topeka, Kan.-based Guggenheim Partners company, released this finding in a series of papers, “Planning With Certainty: A New Strategy For Retirement Income.” The papers describe the results of research the insurer conducted with an independent actuarial consulting firm exploring various joint and single life retirement scenarios.

The tests were designed to determine the best allocation among different investment choices to optimize chances for retirement planning success, specifically not running out of income and leaving assets behind. Using an approach similar to “modern portfolio theory,” the analysis considered allocations among three modern strategies:

• Mutual fund systematic withdrawal (base case)

• Variable Annuities (VAs) combined with mutual fund systematic withdrawals, and

• FIAs combined with mutual fund systematic withdrawals.

(For strategies that included either an FIA or a VA with a guaranteed lifetime withdrawal benefit (GLWB), retirement income was funded by mutual fund withdrawals for the first 10 years of each projection period, and then from the GLWB.)

Based on the research’s optimal retirement income allocation, the point along the efficient frontier that best reduced the risk of failure and heightened the odds of success included an FIA with a GLWB in the portfolio mix. The analysis further suggested that combining FIAs with a GLWB and conventional mutual fund spend-down strategies produced higher potential for achieving the goals of a personal retirement income plan.

FIAs are a type of annuity that grows at the greater of a guaranteed minimum rate or interest that is linked to the return of a specified market index, like the S&P 500. By design, FIAs include the potential for some market-linked interest credits with no risk of loss of principal because of market downturns and volatility.

Security Benefit states that while the research analysis strongly suggests that retirees cannot finance a sustainable retirement income with only one traditional product class, it also suggests that implementing a framework that mixes and matches mutual funds and FIAs in various combinations can effectively leverage available resources to generate lifetime income, protect against expenses related to unforeseen events and help maintain purchasing power over the life of a retiree.

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