As The 4% Rule Wobbles, Are Annuities More Attractive Strategy? - Insurance News | InsuranceNewsNet

InsuranceNewsNet — Your Industry. One Source.™

Sign in
  • Subscribe
  • About
  • Advertise
  • Contact
Home Now reading Top Stories
Topics
    • Life Insurance News
    • Annuity News
    • Health/Employee Benefits
    • Property and Casualty
    • Advisor News
    • Washington Wire
    • Regulation News
    • Companies
    • Earnings
    • Video
    • Monthly Focus
    • Sponsored Articles
  • Exclusives
  • NewsWires
  • Magazine
  • Webinars
  • Free Newsletters
Sign in or register to be an INNsider.
  • INN Exclusives
  • Life Insurance News
  • Annuity News
  • Health/Employee Benefits
  • Property and Casualty
  • AdvisorNews
  • Washington Wire
  • Regulation News
  • Sponsored Articles
  • Monthly Focus
  • INN Exclusives
  • NewsWires
  • Magazine
  • Webinars
  • Free Newsletters
  • Insider Pro
  • About
  • Advertise
  • Editorial Staff
  • Contact
  • Newsletters

Get Social

  • Facebook
  • Twitter
  • LinkedIn
Annuity News
Top Stories RSS Get our newsletter
Order Prints
May 9, 2017 Top Stories No comments
Share
Share
Tweet
Email

As The 4% Rule Wobbles, Are Annuities More Attractive Strategy?

By Cyril Tuohy

What is a “safe” withdrawal rate in retirement?

Ask any reputable financial planner and they will respond that it depends – on a client’s time horizon, spending habits, risk tolerance, retirement age and how much comes from other sources such as Social Security and even a defined benefit plan for retirees lucky enough to have one.

Most planners are familiar with the 4 percent withdrawal rate research laid down more than 20 years ago by now-retired advisor Bill Bengen.

The Bengen Rule, a rule of thumb to establish a retirement income floor, is based on a 30-year time horizon.

But what happens with a 40-year or even a 50-year time horizon as people live longer and look to stretch out retirement income? Does the 4 percent rule still hold?

An extended period of low interest rates has put pressure on the 4 percent rule as well, as retirement income portfolios find it difficult to eke out gains without taking on more risk. And more risk is something many retirees can’t afford to take.

“Generally speaking, yes, the new school of thought on initial withdrawals is 3 percent,” said advisor Randy Bruns in Downers Grove, Ill.

But for retirees with a higher percentage of income from guaranteed sources and a lower percentage of expenses tied to nondiscretionary spending, withdrawal rates can be much higher than 3 percent, he said.

Shorter time horizons – 20 years, for example – and retirees with flexibility to adjust in turbulent times or absorb a change in the sequence of returns, can withdraw as much as 5.5 percent or even 6 percent of their retirement portfolio, retirement researchers have found.

An Argument for Annuities?

Is the longevity risk – the risk of retirees outliving their income – an argument for annuities?

Some advisors gravitate toward annuities to provide income. Meanwhile, other advisors - who balk at annuity fees, rigid products structures, their lack of capital appreciation and low yields - prefer to structure bond ladders or hunt for better returns with market-based investments.

If longevity risk isn’t an automatic argument for annuities, it is a good argument for delaying Social Security, which also happens to be the largest annuity program in the country, said David E. Hultstrom, principal of Financial Architects in Woodstock, Ga.

The longer Social Security recipients delay taking Social Security, the higher the inflation-protected payments guaranteed by Uncle Sam.

Hultstrom isn’t a fan of most annuities. But, for advisors leaning toward annuities, the next best option to delaying Social Security is an investment in a qualified longevity annuity contract, or QLAC, followed by a single premium immediate annuity, or SPIA.

Required minimum distributions (RMDs) from individual retirement accounts, which are set by the IRS at 3.65 percent for people age 70, is a good rule of thumb, Hultstrom said.

IRS tables progressively increase the RMD percentage as retirees age. The RMD is set at 5.35 percent for 80 year olds, 8.77 percent for 90 year olds and 15.87 percent for centenarians.

Winning the Income Showdown

Many advisors favor annuitizing at least a portion of a retirement income portfolio to cover “grocery money,” essential or nondiscretionary expenses.

Some retirees will have sufficient income from Social Security and portfolio distributions to pay for groceries and keep the lights on, but other retirees may want a separate annuity for supplemental purposes that Social Security doesn’t provide.

“It’s clear from almost any study that it’s not whether you should annuitize a portion of your portfolio, but how much?” said Scot L. Stark, owner of Stark Strategic Capital Management in Freeland, Md.

Using income annuities delivers a more efficient approach to meeting retirement spending goals than commonly thought, according to retirement income planning expert Wade D. Pfau at The American College of Financial Services.

An investments-only strategy can support greater legacy amounts than partial annuitization in the event of early death. But those higher legacy amounts come at the cost of not having a contractual income guarantee and less liquidity, Pfau argues in a paper titled “Retirement Income Showdown: Risk Pooling vs. Risk Premium.”

“Those favoring spending and true liquidity will find that it is much more difficult than commonly assumed for an investments-only strategy to outperform a strategy with partial annuitization,” Pfau writes.

InsuranceNewsNet Senior Writer Cyril Tuohy has covered the financial services industry for more than 15 years. Cyril may be reached at [email protected].
© Entire contents copyright 2017 by InsuranceNewsNet.com Inc. All rights reserved. No part of this article may be reprinted without the expressed written consent from InsuranceNewsNet.com.

Older

Brighthouse Financial Separation Date Moved

Newer

DOL Rule, Dodd-Frank Face Intransigent Senate

Advisor News

  • Biden ESG rule survives challenge from 25 red states
  • Making your money last: The two-bucket investment approach
  • Succession Planning: mentorship and strategic planning
  • Social Security overpaid billions to people. Now, it’s demanding the money back
  • Convicted murderer Alex Murdaugh pleads guilty to 22 federal financial fraud charges
More Advisor News

Annuity News

  • Committee of Annuity Insurers Issues Public Comment to Treasury Dept.
  • Annuity sales up 27% through six months, LIMRA reports
  • Indexed annuity products set record of $25.1B in Q2, Wink finds
  • Features, taxation of individual annuities help middle-class Americans feel confident about retirement
  • Oklahoma Insurance Department adopts best interest annuity rule
Sponsor
More Annuity News

Health/Employee Benefits News

  • Gov. Reeves announces 11th-hour plan for Mississippi hospital crisis. Opponents pan it as 'too little, too Tate'
  • Feds say thousands of Iowans were disenrolled from Medicaid due to eligibility error
  • Laura Kelly: Kansas lawmakers voted to expand Medicaid before. Do it again.
  • 500K have Medicaid coverage restored after computer problem fixed
  • Healthcare2U introduces Direct Primary Care Advantage
More Health/Employee Benefits News

Life Insurance News

  • Corebridge Financial to sell UK life insurance business to Aviva
  • Analysis shows decreasing mortality risks for Black, Hispanic life insurance applicants
  • U.S attorney alleges obstruction, seeks stiffer sentence for ‘Annuity King’
  • Unharness your business’s epic ascension with life settlement superhero power
  • NC regulators release $1.2B from former Lindberg insurers in receivership
More Life Insurance News

- Presented By -

Top Read Stories

  • SEC cracks down on 9 firms for Marketing Rule violations
  • MAPFRE Insurance faces lawsuit for data breach
  • Low financial literacy may be costing consumers money
  • U.S attorney alleges obstruction, seeks stiffer sentence for ‘Annuity King’
  • Allstate, other insurers among those facing robocall lawsuits
More Top Read Stories >

Press Releases

  • Senior Market Sales Adds EMG Insurance Brokerage to Growing Network of Health and Wealth Companies
  • Investors Preferred Life Insurance Company Names Nikki Pethtel as Its Next President
  • Insurity Celebrates its 15-Year Partnership with RCG Global Services, Marking a Legacy of Trust, Growth, and Digital Transformation
  • Sally Jewell Named Chair of Symetra Financial Corporation Board of Directors
  • TBX® and Ideon Team up to Transform Benefits Management Data Exchange
More Press Releases > Add Your Press Release >

How to Write For InsuranceNewsNet

Find out how you can submit content for publishing on our website.
View Guidelines

Topics

  • Life Insurance News
  • Annuity News
  • Health/Employee Benefits
  • Property and Casualty
  • Advisor News
  • Washington Wire
  • Regulation News
  • Companies
  • Earnings
  • Video
  • Monthly Focus
  • Sponsored Articles

Top Sections

  • Life Insurance News
  • Annuity News
  • Health/Employee Benefits News
  • Property and Casualty News
  • AdvisorNews
  • Washington Wire
  • INN Magazine

Our Company

  • About
  • Editorial Staff
  • Magazine
  • Write for INN
  • Advertise
  • Contact

Sign up for our FREE e-Newsletter!

Get breaking news, exclusive stories, and money- making insights straight into your inbox.

select Newsletter Options
Facebook Linkedin Twitter
© 2023 InsuranceNewsNet.com, Inc. All rights reserved.
  • Terms & Conditions
  • Privacy Policy
  • AdvisorNews

Sign in with your Insider Pro Account

Not registered? Become an Insider Pro.
Insurance News | InsuranceNewsNet