Eye-opening MassMutual study: Little-known retirement income strategy creates guaranteed lifetime income while increasing long-term liquidity

Ending retirees’ liquidity-guarantee trade-off dilemma


(Springfield, Mass.) - A portfolio incorporating stocks, bonds, and incremental purchases of annuity income benefits over time – a process called retirement annuity laddering – produces more guaranteed lifetime income, develops more liquidity to address other retirement needs, and builds more long-term wealth than other commonly adopted retirement income strategies, according to a new report by the Income Management Strategies Division of Massachusetts Mutual Life Insurance Company (MassMutual).

The study, which tested four strategies for managing a retirement income account over 181 time periods (referred to as cases) between 1965 and 2006, found that the three strategies involving an income annuity, whether purchased all at once or over time, generally out-performed the stock and bond-only strategy, regardless of market conditions in the periods studied.

In fact, the investment-only approach, -- even during strong equity and bond markets -- ran out of money in 25 percent of cases. In contrast, the strategy of laddering into a life annuity matched the income goal in 100 percent of the cases tested.

“Although one might expect retirement annuity laddering to provide more income security, it’s surprising to advisors that the strategy also provided more liquidity and built more wealth at the same time,” according to Jerry Golden, president of MassMutual’s Income Management Strategies Division. For example:

* While the stock- and bond-only strategy preserved the original deposit at the end of each period tested in just 45 percent of the cases, the laddered life annuity strategy preserved the original deposit in 93 percent of the cases.
* For the 45 percent of the cases in which the stock- and bond-only strategy preserved the original deposit, the average liquid value of the laddered life annuity strategy was 66 percent higher.
* In every case, the laddered life annuity strategy matched the income of a life and 20-year certain annuity (which offered no liquidity) utilizing 100 percent of the deposit, and on average more than tripled the original deposit at the end of the period. (The target income goal averaged nearly 9 percent at the start of each case.)
* In contrast to a strategy of living off interest and preserving the original deposit, the laddered life annuity strategy matched the income in every case and on average resulted in more than five times the original deposit.

Moreover, the study found that retirement annuity laddering was the most effective strategy of those studied regardless of market conditions, topping the performance of other strategies during both good and bad markets.

The surprising results are part of a follow-up to a previous study on retirement income by MassMutual. An initial 2007 analysis studied the performance of hypothetical accounts for a 27-year time period, beginning Jan. 1, 1980, a time of generally favorable performance of the equity and bond markets. The new supplement went further, examining 181 time periods dating to 1965 and examining different income targets.

“These findings should be a real eye-opener to Boomers, their advisors and the financial services industry,” said Jerry Golden, president of MassMutual’s Income Management Strategies Division. “The study suggests that making laddered purchases into an income annuity can provide guaranteed income while still making funds available to the retiree to address non-income needs, such as medical expenses or gifting.”

“As for the financial services industry, the study suggests that it will be difficult to invent a new product or program that can top the performance and attributes of retirement annuity laddering,” said Golden. “A very convincing solution to the retirement income puzzle has been right under our noses all along.”

The study results come at a time when large numbers of retirees are concerned about the security of their income and are increasingly willing to trade liquidity for guarantees -- which could be a mistake, according to Golden. For example, 42 percent of seniors say they would trade liquidity for income if they were certain they would not lose any money and 40 percent say they would trade liquidity for income if they were protected against stock market shocks, according to the American Association of Retired Persons (AARP).

“But our analysis suggests that you don’t have to make that trade-off – as long as you pursue a laddered life annuity strategy,” said Golden. “You can create both guaranteed income and long term liquidity. Many retirees may be making compromises that they simply don’t have to make.”

The study tested the performance of various asset allocations within a hypothetical $100,000 retirement account tested to produce the same targeted level of annual retirement income over 181 27-year investment periods at monthly starting dates from January 1, 1965 through January 1, 1980.

While including a fixed income annuity in a retirement account can be the most effective strategy, according to the study, deciding when to purchase the income annuity—all at once or gradually over time—can be crucial in certain market conditions and can vary based on an investor’s comfort level. Gradually increasing the guaranteed income component through annual purchases of additional fixed income annuities can:

* Help smooth out rate spikes or dips in the early years of retirement by periodic income purchases
* Enable retirees to purchase fixed income annuities at increasingly older ages with the possibility of increased income payout rates (income annuities often pay out higher amounts at older ages)
* Provide them with flexibility to adjust their income purchases should their financial circumstances change

The study is one of several ways in which MassMutual is promoting a greater understanding of retirement and planning. Among its many efforts, MassMutual is the exclusive national sponsor of a new two-hour national PBS documentary series that will take a deep and comprehensive look at the financial challenges facing the baby boomer generation. The documentary, Retirement Revolution, debuts in April 2008 and is being broadcast on PBS stations across the U.S.