Financial planners long have counseled retirement savers to keep a blend of bonds and stocks in their portfolios. The bonds kick off income and the stocks provide growth.
That advice now looks in need of a refresh. Bond yields have been bumping around historical lows for around a decade. And stocks provided strong growth during the longest bull market in U.S. history, which ended earlier this year. Stocks have rebounded so strongly since then that they’re now expensive again, and due for a period of below-average returns. This has left retirees with some tough portfolio choices at a time when many face an income shortfall.
Annuities could be a savior, many researchers say, providing stable income for retirees even if markets plummet and as lifespans lengthen. And the Secure Act passed late last year means that annuities should be available in more 401(k) accounts.
There is one big hurdle to the widespread adoption of annuities: their reputation.
Many consumers and financial planners shun them. That’s partly because insurers have muddied the waters by selling complicated annuities with high fees and surrender charges for consumers who try to cash them in. The opaque pricing made it difficult for consumers to comparison-shop.
“I’m fairly biased against annuities,” says Cicily Maton, a Chicago financial planner, citing the fees and big up-front investment. Nonetheless, she says low-fee income annuities make sense for retirees who have a history of overspending or who won’t be able to tolerate market gyrations.
Retirement researchers, however, say many of these concerns don’t apply to life income annuities, which have simple pricing and minimal fees. Numerous top-rated insurers offer them. Consumers can easily comparison-shop them by going on websites like immediateannuities.com.
David Blanchett, Morningstar’s head of retirement research, says that retirees whose basic expenses aren’t covered by Social Security should consider buying an annuity to bridge the gap.
Suppose a 70-year-old married couple with a $1 million portfolio figures it needs $60,000 a year to cover essential expenses but will get only $50,000 a year in Social Security. The couple could purchase a $200,000 annuity from a top-rated insurer yielding 5.5% to bridge the gap. That annuity would kick off an extra $11,000 a year in income as long as either spouse was alive.
After buying the $200,000 annuity, the couple would still retain $800,000 in their portfolio to cover unexpected expenses plus the niceties of life, like vacations or restaurant meals.
“I wouldn’t annuitize everything,” Blanchett says. “You need a sizable portfolio in case you need a new roof or something happens.”
Nonetheless, Huang maintains the annuity without the money-back guarantee offers the most bang for the buck for consumers. “I think it is the most efficient type of annuity,” he says, “because it takes the mortality pool and uses that to maximize the payouts to consumers.”
Annuities don’t make sense for everybody. Some retirees are already getting plenty of money to cover their basic expenses through Social Security or pensions. Other affluent retirees have adequate assets to ride out market downturns.
Once retirees have covered their basic needs through secure sources of income like annuities, they can be more aggressive with their investment portfolio, investing more heavily in stocks, says Pfau. “At that point, that money is more for legacy and upside,” he says. “It’s not really part of day-to-day needs.”
In effect, annuities end up replacing the bonds in a retiree’s portfolio. “Instead of thinking of retirement as stocks and bonds,” Pfau says, “think about retirement as stocks and annuities.”
source article: https://www.barrons.com/articles/3-european-stocks-offering-solid-yet-sustainable-dividends-51595228400