Sometimes less can be more.
Just take what has happened to annuity rates during this year’s stock and bond bear markets. Though the dollar value of your stock and bondholdings has declined markedly, each of those dollars is now able to purchase a larger annuity payout.
In fact, depending on the specifics of your situation, these two effects will largely offset each other. The net effect is that, despite this year’s bear market, you’re just as well off as you were at the top of the market at the beginning of this year.
These countervailing forces should help all of us be more sanguine about the markets’ gyrations. It’s an ill wind that blows no good.
The accompanying chart illustrates how annuity payout rates are closely correlated with interest rates on investment grade corporate bonds. When those rates were at their multidecade lows a couple of years ago, a 65-year single male willing to pay a $100,000 premium could have secured an annuity payout of about $450 per month. Today, with interest rates markedly higher, that same $100,000 premium could purchase an annuity payout of about $570 per month—around 27% more.
(These figures are from ImmediateAnnuities.com for a “Life & 10 years certain” annuity. Such an annuity provides guaranteed lifetime income for the annuitant, but if the annuitant dies within the first 10 years, payments continue to the annuitant’s heirs for the remainder of those 10 years. Note also that the payout rates in the chart are based on averages from different insurance companies, so depending on which company you choose your rate might be better or worse. Furthermore, your payout rate also depends on the state in which you live. Though annuity payout rates for females are different than for males, I’d reach the same conclusion if I focused on their payout rates instead.)
Kicking yourself for nothing
Imagine that you’re a 65-year-old male and that at the bull market top in early January you owned $100,000 of an S&P 500 index
SPX,
fund and, rather than purchase an annuity with that amount, you chose to bet that the bull market would continue. Your index fund is now worth around $77,400, and you’re kicking yourself for not buying that annuity in early January.
But you’re kicking yourself for nothing. Had you annuitized at the bull market high, your monthly annuity payout would be about $450. With your current $77,400, in contrast, you could secure a monthly payout of approximately $441 per month—or only about 2% less than at the bull market top.
A largely-similar conclusion would be reached if you had a 60% stock/40% bond portfolio. Even though both the stock and bond portfolios of your portfolio are in bear markets, I calculate that, instead of the $450 monthly payout you could have secured at the beginning of the year, your reduced portfolio value could purchase a monthly payout of $456 today—about 1% more. (This calculation assumes that the bond portion of your portfolio is invested in an index fund such as the iShares Core U.S. Aggregate Bond ETF
AGG,
)
Things don’t always work out this well
It’s worth emphasizing that things don’t always work out this nicely. The more usual pattern is for interest rates to decline during many stock bear markets, for example—which is why bonds often provide a cushion again stocks’ losses during bear markets. But notice that, when that happens, the annuity payout you can purchase declines along with the value of your equity holdings.
There’s much irony here. Many investors are bemoaning that this year is an exception to that normal pattern. Rather than bonds cushioning the stock bear market, this year they have suffered a bear market of their own. And while that’s undeniably upsetting, it does have the silver lining of increasing the annuity payout you can purchase for the same premium.
So be careful what you wish for.
Mark Hulbert is a regular contributor to MarketWatch. His Hulbert Ratings tracks investment newsletters that pay a flat fee to be audited. He can be reached at [email protected].
