Robert Ibbotson's Latest Research Revelation
Renowned Economist Suggests Fixed Indexed  
Annuities Can Enhance Retirement Returns 
June 30, 2018 - Few names are as universally revered in the worlds of economics and finance as Roger G. Ibbotson, PhD. So, when the Professor in the Practice Emeritus of Finance at Yale School of Management puts out a white paper entitled "Fixed Indexed Annuities: Consider the Alternative," people pay attention.

Read the Press Release [HERE]

Chock full of the kinds of charts and graphs for which Professor Ibbotson is famous, the gist of the paper goes something like this:

When you're young, buy stocks. You have time to recover losses.

When you're closer to or in retirement, reduce your risk and trim your stock exposure.

Conventional wisdom suggests a traditional 60/40 stock/bond mix as a starting point. Shift percentages based on individual risk tolerance.

Meaningful bond returns are unlikely over the next few years due to current low interest rate environment.

By rededicating some of your bond allocation toward a fixed indexed annuity (FIA), your return potential is enhanced without sacrificing risk.

Ibbotson is not a recent convert to annuities for retirement, by the way. A decade ago, he co-authored "Lifetime Financial Advice: Human Capital, Asset Allocation and Insurance" which concluded, unequivocally, that annuities "have a rightful place in an individual investor's optimal retirement portfolio."
Yes, Please Do Consider the Alternative

In the simulations performed, a mix of 60/20/20 stocks/bonds/FIAs performed 6.8% better (8.12% returns versus 7.60% returns) than a 60/40 stock/bond mix during Below Median Bond Return Environments. Further, the same mix performed a scant 3.05% worse (9.21% versus 9.50%) assuming an Above Median Bond Return Environment.

"In simulation, . . . a generic large cap equity FIA using a large cap equity index outperformed long term bonds with similar risk characteristics and better downside protection over the period 1927-2016."
Roger Ibbotson
In other words, substituting a fixed indexed annuity for half of your bond holdings projects to increase your returns while ensuring you don't lose money. If you believe, as many do, that interest rates can't go any lower and are likely to rise, bonds are unlikely to generate the returns to which investors have been accustomed. When rates rise, bond returns decrease.

Consider the alternative.

The Elephant in the Financial Papers

I am not a fan of fear tactics; however, if you spend any time reading financial news, there's no escaping the sad reality that some financial advisors put their own interests above your own. In some cases, well above yours. Think Bernie Madoff and certain advisors who have been convicted of or are alleged to have embezzled from professional athletes and Hollywood celebrities.

And these are just the high-profile cases that make the news.

While most financial advisors run ethical practices, a 2017 Hiscox Embezzlement Study concluded the financial services industry is especially vulnerable to white collar crime, bilking clients and employers out of more than $120 million.

Because many nefarious financial con artists hide within plain sight, often preying upon unsuspecting victims in places they feel most secure (churches, country clubs, etc.), those who are wronged feel great shame for their misplaced trust.

Why bring all this up now? To point out that there is no "middle man" when it comes to annuity purchases. When you buy an annuity, 100% of the funds go directly from your account to the life insurance company offering them. Advisers have no access to your money. Ever! The risk of misappropriation of funds by a third party is eliminated.

Rewire When You Retire

Whatever retirement advice you choose to follow as you lead up to your Grand Transition, know this: The strategies that got you to retirement will not necessarily sustain you in retirement. You need to re-wire, if you will.

If not, let's talk!

Sequence-of-returns risk, which is largely irrelevant leading up to retirement, is a major concern you should ignore only at your own peril. Market losses early in retirement when you're drawing down your nest egg to live off, can be catastrophic. Particularly if they occur in the first few years of retirement.

Highly recommended BONUS reading from New York Life


If you're close to or in retirement, your overall chances of retirement success increase when you incorporate some annuities into your retirement portfolio. Every situation is unique but if your adviser or some "legendary" self-promoter on the radio tells you to avoid them at any cost, point them to all the empirical evidence that confutes their position.

Thank you for the opportunity to be of service and best wishes for continued success in your personal and professional lives.

Dan Finn, CPCU, MSSC™, RICP®
Master's Certified Structured Settlement Consultant™
Retirement Income Certified Professional®

NOTE: This newsletter is presented for educational purposes only using material freely available in the public domain and should not be construed as tax or legal advice. All rights reserved.

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