With annuities sales soaring to highs not seen since the Great Depression and the industry on the verge of successfully lobbying Congress to make annuities an automatic default option in retirement plans, Morningstar has released research that says annuities deliver little benefit to investors above certain wealth levels.
The firm says annuities add little upside for investors if their wealth is already more than 36 times their needed annual retirement income in a report by the Morningstar Center for Retirement and Policy Studies entitled, “The Retirement Plan Lifetime Income Strategies Assessment."
For example, the report said, if an investor needs $50,000 a year in retirement and has already accumulated $1,800,000 million in assets, there are better strategies for maximizing retirement income than annuities.
“We found that the ratio of wealth a participant has to their annual retirement income need is the most important metric for determining the benefits of a lifetime income strategy,” Spencer Look, Morningstar’s Associate Director Retirement Studies and Public Policy, told Financial Advisor Magazine.
“Annuities do not add much value when an investor is already well-prepared for retirement," he added. "They also do not help much when Social Security or other guaranteed income sources already cover the majority of anticipated retirement expenses.”
Overall, Morningstar evaluated how seven different strategies can help retirees reach their income and estate planning goals. One strategy that can better serve those who have amassed at least 36 times their retirement income needs is the benefit of Social Security bridging, or using alternative sources, such as 401(k) assets, to delay claiming Social Security benefits until the maximum possible age.
“Retirees should consider Social Security bridging before other lifetime income strategies. While annuity-based strategies can boost guaranteed income or bequests, none can compete with the Social Security bridge strategy to offer more generous benefits,” Look said.
Unlike with private annuities, Social Security has no profit margin requirement. Further, the benefits are based on life expectancies of the U.S. population instead of the above-average life expectancies used by insurance companies. There is also inflation protection.
“While some private annuities offer a cost-of-living feature, it is not comparable to Social Security, where the benefits are linked to the Consumer Price Index for urban wage earners and clerical workers. Nevertheless, there is still a place for annuities as we find that participants can benefit when annuities are combined with the bridging strategy,” Look and his co-author Aron Szapiro, head of retirement studies and public policy for Morningstar, said in the study.
The analysis also found that while health issues can worsen retirees’ standards of living, “we do not find that they change the relative value of lifetime income strategies as long as the plan participant has the right profile to benefit from annuities to begin with an only uses part of their wealth for the annuity purchase."
Morningstar surveyed the lifetime income landscape and identified seven distinct strategies that plan sponsors could offer to participants, including drawing down from a conventional portfolio.
The Link LonkOctober 07, 2022 at 10:46PM
https://www.fa-mag.com/news/annuities-offer-little-benefit-to-wealthier-retirement-savers--morningstar-says-70041.html
Annuities Offer Little Benefit To Wealthier Retirement Savers, Morningstar Says - Financial Advisor Magazine
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