Morningstar - Q2 2021 - 61

What About Annuities?
Rekenthaler: We've been talking about stocks
and bonds for retirees' asset allocations. Where do
annuities fit, if at all?

Siegel: If you buy a deferred annuity that begins
its payout at age 85, you're not going to pay
much. You're getting a huge return conditional on
being there to collect it. It seems to me to be a
sensible strategy, because if you retire at, let's say,
68, and you begin to collect the deferred annuity
at age 85, you only have to save enough for
17 years. That's a manageable problem that you
can get your mind around. Let's say I need
$100,000 a year to live. Even at a zero interest rate,
if I save $1.7 million, I'm all set.

Without annuities, the retirement problem
is almost insoluble. We don't know how long
we're going to live, but everybody knows
somebody who's lived to 105, so we want enough
money for that possibility. So, you can never
spend anything. Letting an insurance company
worry about those last decades, if you
happen to live that long, is a strategy that I've
become very interested in.

Annuity manufacturers are giving you something
for nothing. You should probably take it.
And you're going to live better in retirement for it.
Some combination of immediate annuitization,
delayed Social Security, and deferred annuitization
through qualified longevity annuity contracts
is really the best way to get an attractive lifestyle
from your money in a high-asset-price environment.
Now, the income that you're going to get is
less than it was five years ago, but the income that
you're going to get with bonds is even lower
than that.

I agree completely with Larry on annuities.
Annuities are inexpensive. We have done research
on the pricing of annuities in today's market,
and one of the upshots of having easy, immediate
access to annuity quotes is that it's made
annuity payments more generous. The implied
loads on what annuity manufacturers are
providing to people is pretty much nothing, if you
compare their promised income to the amount
of income that you could generate to the expected
average longevity with Treasuries. Competition
seems to have bred more attractive pricing relative
to bonds.

Siegel: They're going to have to admit that they
haven't bought them. They keep looking at
them but are afraid to give up the capital. It's nice
to have money. We used to collect pensions from
jobs, supposedly guaranteed income-until
somebody buys the company and finds a legal way
of avoiding making the payment. Now, we
accumulate assets, and it gives you a feeling of
security to know that you could possibly buy

	
Without annuities, the retirement problem
is almost insoluble.
Larry Siegel

Siegel: Do you worry about annuity default risks?
Finke: When TIPS rates are negative, that increases
the value of income that is inflation-protected.
There's one way to get more inflation-protected
income, and that's by delaying Social Security. This
low real-interest-rate environment that we're
in right now increases the value of delaying Social
Security to age 70. For most retirees, that's
probably one of the most overlooked strategies for
generating income.

actually fess up to whether they have bought
these annuities for themselves.

Finke: I do a lot, Larry. Some of the quotes
are so attractive, especially among lower-rated
insurance companies, that I get concerned.
Especially with a deferred-income annuity, where
I'm not going to see that income for another
15, 20 years, I'd pay close attention to the credit
ratings of those insurance companies.
Guyton: That's where Michael's point about Social
Security is so important. Retirees who decide to
hold off on collecting the full-bore Social Security
and use their assets to get them to that point
are effectively buying more annuity income.
Delaying Social Security is the best first annuity.

a house in Pacific Grove, whereas you can't
with the pension. Nobody's going to give that up
easily by going to the annuity market and
buying themselves a pension with all their cash.
You do it with a little bit. That's where the deferred
annuity comes in, as it only costs a little bit
of your total net worth.
Rekenthaler: People love their pensions and hate
to give them up for a 401(k), but then once they have
a 401(k), they don't want to go back to a pension.
This probably belongs in the behavioral researcher
" people are not always fully rational " camp .

Siegel: It's bounded rationality. You're working
within the framework that you have.
Rekenthaler: For those who seek to live off their

The other piece of the annuity decision is that
when retirees look at what they believe can be
generated from their portfolio, they say, eh, maybe
I can do a little better [than annuity income],
and I don't have to give up the money. I would love
to see somebody write an article-whether
it's academics or financial planners-where they

investment income, it's a critical topic. Thanks to you all
for your insights on these unprecedented times.

K
John Rekenthaler is a vice president with Morningstar
Research Services LLC.

morningstar.com/lp/magazine

61
http://www.morningstar.com/lp/magazine
Morningstar - Q2 2021

Table of Contents for the Digital Edition of Morningstar - Q2 2021
