The number one fear of many retirees is running out of money before they run out of life. For clients who share this concern, new research suggests that they use annuities to replace certain portions (or all) of a client’s portfolio that would normally be allocated to bonds and other fixed income investments. Doing so, studies show, may significantly extend the life of a client’s assets.

While this strategy has advantages, such as reducing portfolio risks associated with market downturns or longevity, the benefits come at the expense of liquidity and upside potential.

If interest rates move higher, client’s bond and bond fund prices will likely decline. And if clients need to sell those assets to support lifestyle needs, they may be forced to “lock in” those losses.

Using a single premium immediate annuity (SPIA) to replace the bond portion of a client’s portfolio can effectively eliminate or substantially reduce a client’s interest rate risk (on this portion of their assets). This is especially true if the SPIA incorporates inflation protection in the form of a cost-of-living adjustment (COLA).

The use of SPIAs offers one additional benefit beyond bonds: mortality credits. If clients live long enough, a portion of their annuity income will be attributable to others who have purchased an annuity but were not as fortunate in the longevity department.

Sure, it’s possible that your client could end up being the “too-soon-to-make-it-worth-it” death, but there’s generally no way to know that in advance. And if running out of money is the client’s primary concern, an early death is actually a mitigating factor.

What about those who are not concerned about running out of money, but rather, are primarily motivated by legacy goals and wish to leave as much as possible to future beneficiaries? Would the use of a SPIA to replace bonds still make sense? Quite possibly.

It all depends on a couple’s longevity. Much like the decision of when to claim Social Security benefits, there is a break-even point for this strategy to make sense from a net liquid assets point of view.

For a couple 65 years of age with a 50/50 portfolio, in which the 50 percent portion allocated to bonds is redirected to a SPIA payable equally over both lives and with a 2 percent COLA adjustment and no death benefit thereafter, the breakeven point — at today’s rates — is roughly 22 years.

Actuarially speaking, there is a greater than 50 percent chance that at least one of the two members of the couple will be alive at that point. Thus, for most clients, this strategy — which requires irrevocably “forking over” a chunk of assets to an insurer — will result in leaving a greater legacy amount to heirs.

If you are interested in finding more abouit this strategy call us for a free analysis.