Update on Retirement Income Market Conditions

I’m working to update the assumptions I use to explain “current market conditions” in my research. I have been using numbers from April 2012, but I’m updating these to late October 2012.
 
During those months, interest rates have continued to fall, which in turn has brought down SPIA rates. As well, realistically speaking, whatever the safe withdrawal rate was before or might be now, the lower interest rates also imply a lower safe withdrawal rate.
 
Yields for TIPS of up to 20-years to maturity are below zero. The difference between constant maturity Treasury yields and TIPS yields provide an imprecise measure of expected inflation, and the markets are expecting inflation rates of about 2.5% over the long-term horizon. This compares to a historical average since 1926 of just over 3%.
 
For a joint and 100% survivors annuity (which pays out the same amount until both members of the couple are deceased) for a 65-year old couple, the best payout from a highly rated company for a fixed SPIA is now 5.43%. For an inflation-adjusted SPIA, the best payout is 3.55%. The fixed SPIA rate is 53% higher, so it will provide more income until cumulative inflation of 53% occurs.
 
Though that difference is about the same before, perhaps what is more relevant is that the payout rate for an inflation-adjusted SPIA is just about the same as the payout rate for a SPIA that will provide an annual income growth rate of 3% regardless of the path of inflation. This can be interpreted as meaning that the annuity company is pricing inflation-adjusted annuities under an assumption that inflation will average 3%, which isn’t all that much higher than the current breakeven inflation rates. This helps to make inflation-adjusted SPIAs more attractive, especially for anyone who is particularly worried that inflation may turn out to be higher than what is currently built into market prices.

U.S. Government Yield Curve and Single-Premium Immediate Annuity Payout Rates

The Next Generation of Income Guarantee Riders (Part 1)

My new column for October is now available at Advisor Perspectives. It is, "The Next Generation of Income Guarantee Riders: Part 1 – The Deferral Phase."  This project is actually turning out to be the equivalent of writing a full research paper. But rather than one long paper, it will be released in serialized form as my October, November, and December columns.

This column provides a deeper look at income guarantee riders. The motivation for digging into this again (as I wrote about GLWBs last year) is that earlier in the year, Aria Retirement Solutions created a new income guarantee rider that could be applied to a portfolio of mutual funds and ETFs. It is no longer necessary to buy a variable annuity to obtain access to such a rider. That is both esoteric and exciting at the same time.

As I worked on this initially to compare the features of Aria's RetireOne guarantee to Vanguard's GLWB (an apt comparison, since both riders are underwritten by the same insurance company), I ended up finding many things to look at in more depth.

This first column provides a look at how these guarantees would have fared historically in supporting a guaranteed benefit base over a 10-year deferral period. Since the guarantees are not inflation-adjusted, I find that the amount of downside protection provided by the guarantees may be less than people expect. As I summarize in the conclusion:

[Those] seeking to protect against a sequence of bad returns just before retirement will find that the guarantee still leaves them worse off in inflation-adjusted terms, especially as the rider fees hamper the ability of the contracted assets to grow faster than the unguaranteed alternative.

Please have a look!