With protracted low interest rates, retirees have taken extra risks to try to generate yield on their money. That means they are moving it out of fixed-income securities and into equities, often without even considering annuities as a potential higher yielding fixed-income substitute.

That was one of the key takeaways from a Wednesday afternoon panel, led by David Lau, at the Next Chapter conference sponsored by Financial Advisor. Lau is the founder and CEO of DPL Financial Partners in Louisville, Ky., which works with RIAs and annuity providers to help match low-cost annuities to clients' needs.

Lau’s panel discussion, called “The Role of Annuities in Retirement Income Portfolios,” also included David Blanchett, PhD, a managing director and head of retirement research at QMA, a quantitative equity and multi-asset solutions specialist, and Bryan Montemurro, a financial advisor at Two West Advisors in Overland Park, Kan.

Annuity Perceptions
Lau started by discussing the perceptions—or rather the misperceptions—of annuities that persist today, including the ways they are overlooked.

Montemurro added that he used to present the idea of annuities to clients in a whisper, as if they were a dirty word.

That's no longer the case. A range of new products have emerged that cost less and have less stringent surrender terms—meaning clients don't get penalized as badly, or at all, for withdrawing funds early.

The Low Yield Environment
Blanchett noted that although annuity payout rates are blunted by low interest rates, the lower rates actually make annuities a better bargain than a regular portfolio. With annuities, you have the benefit of mortality credits, sometimes called mortality pooling, which is a calculation based on the annuitants’ life expectancy. That calculation stays the same no matter where interest rates are. Next to a bond portfolio today, Blanchett said, you can actually generate more income from an annuity.

His analysis showed that, because of mortality credits, annuities can generate income about 40% more efficiently than bonds today.

"That's a very meaningful benefit to client retirement income," said Lau. But he added that some advisors are waiting till interest rates rise—effectively trying to time the market, whereas they would never try to time equity markets.

Retiree Fears
Most retirees fear outliving their assets, and another big group fears market volatility. One of annuities' main purposes is providing secure retirement income that can't be outlived. Montemurro said he often explains to clients that they insure their most valuable assets, such as their home, yet don't think about securing their source of retirement income, which is what annuities do.

Lau added that many people think lifetime income guarantees come from annuitizing; instead, they come from separate income riders. The principal of the annuity can continue growing even while income is drawn off.

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