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.

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

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.

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.

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.

The concept is seductive: a financial product that provides upside exposure in the event that equity markets trend up and to the right while also providing a floor of protection in case the bottom falls-out from under markets again.

Sort of like having your cake and eating it too. Very tempting in light of the massive financial uncertainty that has existed for the past several years.

In his most recent Investment Outlook letter, PIMCO founder Bill Gross suggests that investors need to prepare for difficult adjustments in a world of near zero real returns from financial capital. 

Gross describes the dying cult of equity that has evolved over the past century, and advises readers to expect future equity returns that are much less than 6.6 percent average real return (the “Siegel constant”) since 1912. 

In a recent Barron’s interview, Ray Dalio discusses financial deleveraging and makes an interesting point about the relationship between nominal interest rates and nominal growth rates in the economy.  

According to Dalio, the key to successful deleveraging is keeping nominal interest rates below nominal economic growth rates.

Maddy Dychtwald is a nationally recognized author, co-founder of Age Wave, and a leading expert on the changing demographic trends shaping the marketplace, the workplace and our lives.

Having spent twenty-five years exploring and forecasting lifestyle, marketing and retirement implications of the age wave, she has recently emerged as a renowned authority on the economic ascent of women, including its impact on the financial services industry.

Mark J. Warshawsky is Director of Retirement Research at Towers Watson.

Dr. Warshawsky served as assistant secretary for economic policy at the U.S. Treasury Department from 2004-2006 and he has held senior level economic research positions at the Federal Reserve Board, the Internal Revenue Service and TIAA-CREF.