Annuity Digest | Objective Annuity Information

Retirees Relocating Overseas Have Currency Risk Issues to Contemplate

Americans in their fifties have lost much of the equity value in their homes, as well as in their saving and investment accounts, due to the severe economic downturns endured over the past decade.

Retirement planning is now more difficult than ever for this generation, causing many to contemplate moving overseas where the cost of living is not nearly as high, as it is in the states. There is also a subset of retirees that want to return to their homeland, necessitating a major relocation move, in any event.

Jackson Approaching Variable Annuity Capacity Limits

In yet another sign of variable annuity capacity constraints, Jackson National recently announced that they are approaching the upper range for 2012 sales of variable annuities with guaranteed living benefits.

Jackson’s November 8 press release indicates the company has roughly $1 billion worth of remaining 2012 capacity.

Jackson indicated that this remaining capacity will be used for new product sales and that they will no longer accept new 1035 exchange business or qualified transfers of of assets for variable annuities with GLBs as of November 13 2012.

Visualizing the Demographic Challenge

Understanding the Value of Living Benefit Guarantees

Advisor Perspectives just published the first in a series of articles from Wade Pfau. These pieces are important and should be read by anyone considering guaranteed lifetime withdrawal benefits or any of the other optional guaranteed living benefit features that accompany variable annuities.

Annuity Duration

Duration is a measure of the time associated with cash flows or payments from a bond. Duration measures the amount of time (in years from the purchase date) required for a bond owner to receive interest and principal payments that are equal to the cost of the bond.

Long duration bonds have payments that are spread-out over a relatively long period of time (e.g. 10-20 years). Shorter duration bonds have payments that might span over five years or less.

Notes from the CFA Institute Fixed Income Conference

The CFA Institute just held its 2012 fixed income conference in San Francisco.

Speakers shared a very broad range of perspectives on fixed income issues over the course of about a dozen sessions.

Session notes and observations (in no particular order) include:

Demographics and Deleveraging -- Rick Rieder, Blackrock

The Case for Mutual Insurance Companies

The best interests of financial services consumers are much better aligned with a mutual insurance company than a stock insurance company.

Mutual insurance companies are owned by policyholders. Owners of an insurance contract issued by a mutual company are both customers and owners of the insurance company.

Stock-based insurance companies are owned by shareholders, so their focus is divided between customers and shareholders.

Questioning the Need for Bonds in Retirement

Conventional financial wisdom says that bonds should comprise an increasing percentage of a portfolio as the owner ages and heads into retirement.

In theory, a retiree’s need for income and a reduced tolerance for risk are the main drivers of the larger allocation to bonds.

A key consideration, though, is whether bonds are the best or “optimal” way to address lifetime income needs and the reduced appetite for volatility.

Morningstar Research Quantifies the Value of Financial Planning for Retirement

New retirement income research from Morningstar provides a framework for quantifying the value of effective financial planning for retirement.

Morningstar’s retirement research team uses the concept of “Gamma” to refer to the extra retirement income that can be attributed to better financial planning and decisions.

Are Inflation Adjusted Annuities Worth the Cost?

Inflation protection for fixed annuities would seem to be a sensible consideration given the fact that central banks around the world are doing everything they can to reflate in the wake of an historic deleveraging.

After all, the worst possible place to be if and when inflation does kick-in is on the receiving end of nominal (not adjusted for inflation) fixed payments, and most fixed annuities fit this description perfectly.

While the inflation protection makes sense in theory, it turns-out that inflation-protected annuities may not be so sensible in practice.

A Capital Market for the Risks of Aging Societies

Swiss Re is very good at highlighting the scale of longevity risk on a global basis and the challenges--financial and otherwise--that result from aging societies.

A recent report from Swiss Re highlights the magnitude of the longevity risk challenge and calls for the development of a capital market to deal with the high hurdle of funding longer lives.

Points from the report that highlight the scope of longevity risk include:

Research Highlights Fixed SPIAs

Retirement researcher Wade Pfau published a research paper titled “An Efficient Frontier for Retirement Income.”

Pfau’s paper analyzes the relative merits of equities, bonds, fixed single premium immediate annuities (SPIA), inflation-adjusted SPIAs and variable annuities with guaranteed lifetime withdrawal benefits (GLWB).

Each of these allocation options are examined in the context of achieving retirement spending goals.

Pfau creates an efficient frontier for a hypothetical 65 year old couple requiring a 4 percent withdrawal rate.

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