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Annuity can boost investor's return, study finds

The Baltimore Sun

An immediate annuity may not just provide income, it may help portfolios grow more than those without one.

Adding an immediate annuity to a retirement portfolio of stocks and bonds improved overall investment returns and lowered risk, a new study shows, but that success depended in large part on finding the right annuity. And that's a tall order for real-world retirees making investment decisions.

Unveiling the study last month at an InvestmentNews retirement conference in New York, MassMutual Financial Group officials said they not only confirmed annuities' risk-reduction powers in a portfolio, but also showed that the presence of annuities boosted returns.

Starting with a hypothetical $100,000 in 1980, the company back-tested portfolios of stocks and bonds only, then two portfolios that added annuities to the mix. The goal of the overall investment portfolio was to generate $10,600 a year in income. Keep in mind the annualized growth rate over the period was 13.25 percent for stocks and 9.11 percent for bonds.

By the end of 2006, the portfolio with 50 percent stocks and 50 percent bonds was worth $439,346 after the income withdrawals.

Far higher gain

During the same period, another portfolio was tested that started with 50 percent stocks, 30 percent bonds and 20 percent in an immediate annuity. Over a seven-year period, the annuity was added to each year until its annual payout reached $10,600.

That portfolio ended the period at $743,266, far above the gains generated with stocks and bonds alone, the study found.

Creating the income security of an annuity to take care of basic expenses allowed investors to take more risk with their stocks, allowing equities to grow over time and assume a larger share of an investor's overall portfolio, said Jerry Golden, president of MassMutual's income management strategies division.

"People who bought the annuity gave up liquidity and wealth if they died early, but they had created income security, which was a good result," Golden said. "People who lived beyond their life expectancy got the income security and created greater wealth" for their heirs. That's because of those higher stock allocations; eventually, the stock side of the portfolio grew to 75 percent.

By the way, the study also considered an investor who purchased an immediate annuity with some protection of benefits should the insured die. Taking into account the addition of a 20-year benefit certainty lowered the overall return to $557,615, though it still bested the portfolio with only stocks and bonds.

Now here's the don't-try-this-at-home caveat: The study used an immediate annuity funded with low-fee serial investments over time, rather than a lump sum, allowing investors to take advantage of current market-pricing trends.

More typically, immediate annuities take a lump sum and convert it to regular monthly payments guaranteed for a specific time period, or for the life of the investor. By contract, variable annuities have an accumulation period, a payout period and an investment component.

Mix of prices

MassMutual does offer such a product inside its managed retirement account and expects to launch a comparable stand-alone annuity this year, Golden said. He likens the annuity strategy to dollar-cost averaging in the stock market, where an investor spreads out contributions in order to capture a mix of prices.

Glenn Daily, a fee-only insurance consultant in New York, said the strategy is not widely available, and he urged consumers to go slow in evaluating the idea of adding annuities to retirement portfolios.

Remember, the certainty of an annuity comes at a price of relinquishing access to principal, experts say, so be sure you understand what you are paying for before you buy.

"With immediate annuities, you can generally wait until age 70 or later," he said. "People who are acting prudently and aware of their options are in no hurry to invest."

Have a retirement question? Write to, or via mail at Your Money, Chicago Tribune, Room 400, 435 N. Michigan Ave., Chicago, IL 60611. If your letter is selected, we may include you and your question in a future column.

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