Annuities in a Goals-Based Framework

Investment professionals rarely agree on the risks and direction of markets, yet many would agree that planning for retirement is one of the most important financial objectives. 

As a goals-based investment manager, we believe a retiree’s main objective is funding a long and fruitful retirement, while not running out of money in the process. When formulating a retirement plan, financial advisors generally choose from two broad investment categories to choose from: managed-money solutions offered by asset managers and annuities offered by insurance companies. Within both categories, the available options are seemingly limitless, making the advisor’s role in the planning process beneficial for their clients. 

Given today’s historically low interest rates, advisors are now challenged to meet retirement income needs without the benefit of high fixed-income yields that were prevalent in the past. This is why we believe an opportunity exists to more effectively combine managed money and annuities more effectively with a goal of both protecting principle and generating the required income. 

We see two broad use cases for annuities. First, fixed index annuities could serve as a substitute for bonds within an asset allocation. These annuities are designed to protect the principal from any losses, while also crediting interest based on a portion of the gains from an underlying index. Unlike bond funds, fixed index annuities do not decrease in value when interest rates rise. In fact, if interest rates go up, the higher yields available to the insurance company may increase an investor’s potential to participate in gains from the underlying index. 

Second, insurance company income guarantees – available from riders or annuitization – may provide higher payouts compared to bond fund yields. Insurance companies pool market and longevity risks across a broad base of retirees, and this type of diversified risk pooling is similar to the advantages of Social Security and defined-benefit pension plans. 

How does this relate to a managed-money solution? We believe incorporating insurance company income guarantees into a financial plan may increase a retiree’s risk-taking capacity, allowing for greater equity allocations outside of the annuity. As we have documented in prior research,1 this may increase the potential for success for retirement spending strategies. For each financial plan, the decision to incorporate annuities, and by how much, involves a series of tradeoffs. Weighing factors such as guaranteed income, access to funds, inflation protection and legacy wealth should all be taken into account. We believe balancing the probability of success in funding a goal with the priority of these tradeoffs is how a goals-based framework can help advisors find the right mix. 

 

 

1Combining Managed Money and Annuities. MMI Journal of Advisory Solutions, Q4 2018. 

Annuity-related content is informational only. Horizon Investments does not sell or issue insurance-related products. Annuities are not suitable for all investors and carry additional risks.


The commentary in this report is not a complete analysis of every material fact in respect to any company, industry or security. The opinions expressed here are not investment recommendations, but rather opinions that reflect the judgment of Horizon as of the date of the report and are subject to change without notice. Forward-looking statements cannot be guaranteed. Horizon Investments and the Horizon H are registered trademarks of Horizon Investments, LLC. 

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