Practical Applications of The Value of Allocating to Annuities

Practical Applications Summary

In The Value of Allocating to Annuities, from the Summer 2020 issue of The Journal of Retirement, author David Blanchett of Morningstar Investment Management explores the costs and benefits of including annuities in the mix of products financial advisors recommend to clients. Annuities have long been unpopular among investors and advisors, who perceive them as complex, expensive, and inflexible. But annuities provide one benefit other products cannot: guaranteed lifetime income. Blanchett says it is unwise to ignore this benefit, and investors and advisors should consider the relative cost of an annuity-inclusive vs. an investment-only strategy.

Blanchett demonstrates that if advisors construct product mixes with moderate fees across annuities and investments, allocating an average of 30% to annuities generates an average alpha-equivalent benefit (that is, an additional return) of 0.73% relative to investment-only portfolios. Therefore, Blanchett says, advisors should educate themselves about annuities, to better identify the right annuity products and the clients for whom they make sense.