Renowned Economist Ibbotson Reveals Research: FIAs May Outperform Bonds Over the Next Decade
It’s unfortunate that annuities as an entire category have gotten a bad wrap from the stock bigots of the world. This side of the industry slams annuities while pushing a traditional 60/40 stock/bond portfolio. The biggest issue with their analysis is that they’re comparing an annuity to a stock (they’re making an incorrect apples to oranges comparison). An annuity DOES NOT compete with or replace stock in a pre-retiree or retiree’s portfolio. An annuity provides the guaranteed income or safe money portion of the “retirement” optimized portfolio. Stocks, on the other hand provide the growth portion of the portfolio and the hedge against inflation. Annuities can (and in many instances) should replace (or compliment) the bond portion of the portfolio. What many “investment advisors” do is fail to think outside of the box they’ve always operated in, defaulting to the traditional 60/40 stock/bond portfolio. At Your Retirement Advisor, we go beyond “thinking” outside of the box and we research strategies that are optimized for retirement and the distribution phase of life. This requires thinking, research and out of the box strategies. Roger Ibbotson’s latest research validates this unconventional approach…
“Renowned economist Roger Ibbotson, and creator of the iconic “Stock, Bonds, Bills, and Inflation” (SBBI®) chart, recently unveiled his latest research that analyzed the emerging potential of Fixed Indexed Annuities (FIA) as an alternative to bonds in retirement portfolios. Researched and written by Ibbotson and his team at Zebra Capital Management, the whitepaper “Fixed Indexed Annuities: Consider the Alternative” suggests bond returns in today’s historically low interest rate environment may be insufficient in meeting the anticipated retirement needs of U.S. investors, potentially placing many at risk of outliving their retirement savings.
Today, Ibbotson’s latest research demonstrates that uncapped FIAs help control equity market risk, mitigate longevity risk, and have the potential to outperform bonds in the near future.
What financial advisors should acknowledge is the immense impact that shifting market conditions, longer life expectancies, and uncertainties surrounding the future of Social Security have made on our U.S. economy,” said Ibbotson. “In recent years, we recognized the potential of these conditions to result in a perfect storm where investors may be left with insufficient funds to carry them through retirement.
Conventional wisdom has most investors de-risking their portfolios by allocating more heavily to bonds as they approach retirement,” continued Ibbotson. “However, investors should consider other alternatives such as FIAs. In this low interest rate environment, complacency can be a danger to our clients’ futures.”
The researchers in Ibbotson’s study utilized S&P 500® Index dynamic participation rates to simulate FIA performance over the past 90 years and presented the results in similar fashion to Ibbotson’s iconic SBBI® chart. The subsequent data, which considered historical volatility, interest rates, and dividend rates, indicated:
- Uncapped FIAs would have outperformed bonds on an annualized basis for the past 90 years.
- It is highly unlikely bond investors will realize as high a return from capital gains in the coming 10 years as they have realized in the past 10 years. In fact, if rates rise, capital gains in the future will be negative (capital losses).
- Uncapped FIAs offer a more tailored risk profile than bonds, capturing a portion of the growth offered by large-cap stocks, while lowering overall market risk.
More detailed findings, as well as a full methodology, can be found in the Ibbotson and Zebra Capital Management whitepaper, “Fixed Indexed Annuities: Consider the Alternative.”
At Your Retirement Advisor, we’ve been utilizing FIAs in our Hybrid Income Portfolios for quite some time. Our independent research and experience with this asset class has proven what the Ibbotson study has shown. You can learn more about our Hybrid Income Portfolios here. You can also download a copy of our Guide to FIAs.
As always, Brian is available to review this research and your portfolio to determine how FIAs may contribute to a better retirement outcome for you. Simply fill out this form to request this complimentary review.
