Simulations comparing investments-only portfolios with ones that include annuities provide positive proof
New research commissioned by Principal Financial Group has found that compared to retirees who rely on investments alone, those who also rely on annuities for guaranteed retirement income can enjoy better outcomes.
“Workers show strong interest in guaranteed income, but one-third of individuals report lower interest in the same guaranteed lifetime income product when it is labeled as an annuity,” said Sri Reddy, senior vice president of retirement and income solutions at Principal.
According to the firm, retirees who benefited from guaranteed income through an annuity were more likely to feel confident and accept more market volatility with their other assets. Based on three simulation case studies that compared strategies that combined annuities and investments with those that used investment alone:
- A retiree who adds an income annuity to their retirement portfolio gives them the same or higher income with lower risk of outliving their savings compared to an investments-only approach;
- Income annuities let a retiree spend at a level that cannot be matched by an investments-only strategy without running a significant risk of having no money at age 95; and
- Using both annuities and investments can enhance the value of assets for heirs over the long term.
“If the reason you saved for retirement was to provide a secure lifestyle, there’s no more efficient way to create lifetime income that through an annuity,” said Michael Finke, Ph.D., CFP. Finke is chief academic officer at the American College of Financial Services and one of the researchers behind the case studies.
Success rates for retirement outcomes, particularly in terms of supporting a spending goal or pursuing greater legacy value of remaining assets, were reportedly attractive for the combination approach as compared to investments-only.
Across the three case studies, the combination approach was found to have a 61%-77% probability of success; meanwhile, the success rates for the investments-only ranged from 35% to 60%.
To complement the quantitative findings, the researchers conducted interviews of income annuity owners to get insights on the emotional impact of having guaranteed income. The responding annuity owners reported that the certainty of an income annuity gave them a greater level of confidence, increased freedom to spend and invest, less stress in retirement, and more certainty in leaving a legacy.
