Is it Ideal to Have Both Fixed and Variable Annuities in One Portfolio?

In a recent TIAA webinar, Benjamin Goodman, the vice president of the firm, stated an interesting yet overlooked fact about annuities.

 

Goodman said, emphasizing the last 40 to 50 years of market history, investors who put their money in pure annuities would’ve kept pace with inflation in the long run. However, they may have experienced some reductions in specific years. He further explained that, although a TIAA traditional fixed annuity always rises, most of those raises don’t keep pace with inflation during the same period. The same thing applies to similar fixed annuity products.

 

Goodman reiterated that these facts should be considered carefully as the retirement planning industry deals with the “decumulation challenge.” That is, the effort to create an ecosystem of solutions that will help participants of defined contribution (DC) plans to spend down their assets in their retirement years sustainably. The vital lesson from this, according to Goodman, is to see how a strategy of blending variable and fixed annuities as the anchor of lifetime retirement income, ideally complemented with other investments and withdrawal options, can result in more significant growth and more sustainable retirement income.

 

Combining Both Annuity Types

According to Goodman, an in-plan variable annuity can complement other income sources like Social Security, with the potential to provide higher income in years when the market is favorable. He said their research highlighted three challenges that can significantly affect retirement success and income sufficiency in retirement: living longer than anticipated, market volatility, and potentially experiencing cognitive decline. Owning a portfolio that’s diversified with fixed and variable annuities can reduce the downsides of these risks.

 

A similar analysis was conducted on the same topic by David Blanchett, head of retirement research at Morningstar Investment Management. He joined Goodman on the TIAA webinar. According to Blanchett, while each source of income has its peculiar risk, combining them can go a long way in managing these risks and creating better outcomes.

 

Owning fixed annuities creates a string of guaranteed lifetime income – with certainty about the amount of returns. On the other hand, adding a variable annuity to the mix also provides guaranteed income which is from a fixed annuity. The payment from variable annuities will fluctuate based on market performance, and as the market grows in the long run, the investor also benefits from this growth. Ultimately, an individual with a mix of fixed and variable annuities will certainty not fall below a specific income level.

The Behavioral Standpoint

Both Goodman and Blanchett agree that this approach is ideal from an economic/actuarial standpoint. It creates a sense of confidence and certainty amongst retirees – which is a precious commodity. The pair said their research has shown that investors mostly fear and are often harmed by market volatility, especially those in the first few years of retirement. By owning a blend of fixed and variable annuities that starts paying upon retirement, retirees can avoid liquidating equity holdings during market downturns.

 

Note that the two guaranteed income investments shouldn’t be the only components in your retirement portfolio. Retirees must hold substantial investments in a liquid portfolio that are invested in the equity market. Goodman and Blanchett further agreed that considering the dependability of getting lifetime income from annuities, retirees could be more aggressive with other aspects of their portfolio.

 

Essentially, suppose an investor isn’t concerned about the market’s volatility. In that case, they will likely have more confidence that their everyday needs can be met with income that will last for a lifetime.

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