Roger Ibbotson Weighs in on Fixed Indexed Annuities 

When Roger Ibbotson recently published a new report on fixed indexed annuities and their place in an optimized retirement portfolio, everyone took notice. Few economists and financial researchers garner the attention and level of respect that he does.

He is Professor Emeritus at Yale School of Management, former chairperson of research firm Ibbotson Associates, and chairman as well as chief investment officer at Zebra Capital Management.  Ibbotson is also a prolific author, having conducted financial research of many topics including investment returns, mutual funds, international markets, portfolio management and valuation.

In past studies, his analysis has been groundbreaking and his principles adopted by financial markets at large. So, it’s not surprising why his research on fixed indexed annuities has gained such wide attention.

In his latest study, Fixed Indexed Annuities: Consider the Alternative, Ibbotson expands his view of the use of a fixed indexed annuity (FIA). Here, he defines a fixed indexed annuity as a tax-deferred retirement savings vehicle that “eliminates downside risk while allowing for the opportunity to participate in upside market returns.”

As baseline benefits, he believes that fixed index annuities, if properly structured, can help control financial market risk and mitigate longevity risk.

What Else can Fixed Index Annuities Offer?

“Given the current low-yield environment, bond returns for the next several years will likely be based entirely on yield. Although the lower risk may be appropriate as we age, the returns may disappoint or be insufficient to maintain necessary income in retirement,” according to his report.

In introducing the study results, he reveals this finding: “My colleagues and I will show that a generic FIA using a large cap equity index in simulation has bond-like risk but with returns tied to positive movements in equities, allowing for equity upside participation.  For these reasons, an FIA may be an attractive alternative to consider.”

Indexed Annuities, a New Option for Retirement Portfolios?

There may be several goals for a retirement plan, but often the primary goal is to provide a steady stream of income that lasts for a retiree’s lifetime.

For many retirees, a common indexed annuity strategy is using the contract for a “income floor.”  In other words, a retiree pays for fixed living expenses with the consistent, recurring fixed income stream provided by the FIA.

According to LIMRA Secure Retirement Institute, sales of fixed index annuities reached $57.6 billion in 2017. And in 2018, indexed annuities may hit new records, with FIA transactions already setting first quarter records.

Events like these have given fixed indexed annuities a place of consideration in retirement portfolios nationwide. But, still, financial advisors may view FIAs simply as an alternative to traditional asset classes, such as stocks and bonds. That is why the weight of Ibbotson’s findings helps expand the view of the potential for indexed contracts.

“…Too often, we simply accept conventional wisdom, which prevents us from considering other alternatives,” he says in his report’s introduction. “Although it is prudent to de-risk portfolios approaching retirement, are bonds our best option? Can we potentially realize a better result?”

 A New Asset Class to Consider?

Characterizing the findings of his study, Ibbotson says, “In simulation, the FIA performed better net of assumed fees than long term government bonds. We showed the FIA had comparable volatility to bonds but with better downside protection.”

He continues: “In our study, when bonds underperformed, the FIA performed quite well. “It is our view, considering today’s low interest rate environment and our modest expectations for bond returns in the coming future, FIAs are an alternative to consider.”

By working in tandem with their financial professional, people can evaluate their personal preferences, their unique retirement planning profiles, and their goals.  Then they can consider the complete range of options to help them meet their objectives.

Need Professional Guidance?

It’s good to consider secondary opinions, especially as you near the retirement home-stretch.  Income planning and other retirement strategies are quite different from the financial and accumulation strategies people purse in their working-age years.

If you are on the lookout for a financial professional, H.F. Hanes & Associates stand ready to help.  Contact us today at 480-607-1346 or 888-416-5433 (LIFE) to start the conversation.