Fixed indexed annuities can do a better job of de-risking a portfolio for older investors than bonds, according to Roger Ibbotson, chairman and chief investment officer for Zebra Capital Management, an independent investment management firm based in Milford, Conn.
According to his latest research, Ibbotson said, uncapped fixed indexed annuities 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.”
Ibbotson is emeritus professor of finance at Yale School of Management and has written extensively on capital market returns, cost of capital, and international investment. He has been awarded the Graham & Dodd Award for excellence in research by the Financial Analysts Journal ten times.
Ibbotson’s latest research 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.”
“Conventional wisdom has most investors de-risking their portfolios by allocating more heavily to bonds as they approach retirement,” said Ibbotson.
Ibbotson said he took into consideration historical volatility, interest rates and dividend rates, and found that uncapped fixed indexed annuities 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,” he said. “In fact, if rates rise, capital gains in the future will be negative.”
Don Dady, co-founder of Annexus, a designer of annuities, said, “The evolution of the industry has made these vehicles more flexible and attractive than ever with the emergence of uncapped product designs and smart beta indices. In today’s fiduciary environment, it is imperative that advisors know what products are available and best suited to address the needs of their clients.”
Article Published by Financial Advisor Magazine March 9 2018
Written by Karen DeMasters