Video Reports

Embed this video

Copy Code

Link to this video

Get LinkEmbedLicenseRecommend (-)Print
Bookmark and Share

By Christine Benz | 10-19-2010 12:30 PM

Low-Cost Annuities Can Provide a Portfolio Floor

The addition of a low-cost annuity to a balanced portfolio can help ease some concerns about longevity risk says Vanguard's Maria Bruno.

Related Links

Christine Benz: Hi. I'm Christine Benz for Morningstar.com. I'm here at Vanguard's office with Mario Bruno. Maria is an Investment Analyst for Vanguard.

Maria thanks so much for joining us.

Maria Bruno: Thank you, Christine.

Benz: Well, Maria, I know you think and write a lot about retirement related issues. And retirees are really confronting a very challenging environment right now, where you've got very low yields combined with the prospect of rising interest rates in the future. I'll just give you a really general question. What tips do you have for retiree's attempting to navigate this very tricky environment?

Bruno: That's a good question, Christine and one that we do get a lot of. It is challenging this environment because interest rates are low. So, if you look even at our total bond market fund for instance, yields are less than 3% right now. So, in order to increase yield, it maybe a natural tendency to try to go longer on the yield curve or perhaps into higher dividend yielding equities to try and increase the current yield.

But with that there's always caution, because we don't know when or if, we are in a low interest rate environment -- when interest rates go up that will have a negative detriment on the overall portfolio for individuals who are trying to maximize current income.

So, I think my key message there to any retiree will be to stay balanced and just make sure to look at it from a total return standpoint. Stay balanced, look at the entire portfolio, take the taxable cash flows, RMDs if needed or if appropriate, and then from there just take distributions as needed with a very reasonable spending percentage.

Benz: And don't be hung up on generating that current income instead if you have to tap your principal occasionally that's better if you are not eroding…

Bruno: It is better over the long-term, yes exactly. I think individuals who are trying to maximize the current yield are actually jeopardizing the future longevity of the portfolio, that's the trade-off there and the danger.

Benz: Right. Now I wanted to talk to you about annuities as well. Single Premium Immediate Annuity, there are certainly a lot of academic research showing that, that can be a good portion of a retiree portfolio. Can you talk about how you think about that issue, and for whom such an investment might be most and least appropriate?

Bruno: Okay. Yes, I mean we do think annuities can be very appropriate for certain type of investors. I think for most investors and most retiree's they need to think about, well what types of fixed-income sources do they have currently, and that would be in the form of social security, potentially a subset of the population has pensions as well, and then, beyond that taxable flows from the portfolio. So, I think what we like to do is really look at that and see whether there is additional spending needs or not.

We think for most investors a balanced portfolio with the systematic withdrawal plan, a reasonable level of spending is very appropriate. But we also acknowledge the fact that individuals maybe very concerned around longevity risk or a feel overwhelmed they are concerned about their portfolio particularly later in life, and that's when annuity maybe a very viable option for portion of their portfolio.

So, we actually think that it's secondary to the portfolio of liquid assets because that would give the individual retiree the most flexibility. But low cost annuity could be very good as a floor to meet certain types of expenses.

Benz: And you all have a new tool that helps people compared them among different annuity types because it's a confusing landscape and there's not a lot of transparency there?

Bruno: It is. Yes, we've actually just launched the Vanguard Annuity Access through Income Solutions, where we've partnered with Hueler Companies. And what we do there through the website, you can go and get an instant quote and can compare services quotes from different types of providers, and there's education material as well.

Benz: And just to be clear you are not offering annuities, you are just helping investors shop among them?

Bruno: Correct, yes, yes. We are offering the service but it's a competitive marketplace and we are offering that through our website through vanguard.com. But the caution there is really to understand the annuity, the options, the payment structure etcetera, which can be complex. But I would caution anyone who's thinking about an annuity would really do the homework and understand the features and comparisons between the types of annuity.

Benz: Well that leads me to my next question. So the Single Premium Immediate Annuity, that's arguably the easiest to understand, once you move into other annuity types, so it gets more complicated. Are there any other annuity types that you like, that you think investors should look at?

Bruno: Well I think for a retiree who is looking at income through retirement, I think the income annuities you mentioned is probably the most common, inflation-protection is a consideration as well.

Benz: And you can now buy that, right?

Bruno: To get an inflation rider with the annuity, yes and there's different features there, term certains, there's different type of payout periods as well. And certainly the more complex with the more features that you get may have additional costs associated with it as well. So, I really think it's good to weigh the value of the features versus what you're paying for those features.

Benz: Well thank you, Maria, great advice, great to hear your insights.

Bruno: Well thank you, Christine.

{1}
{1}
{2}
{0}-{1} of {2} Comments
{0}-{1} of {2} Comment
{1}
{5}
  • This post has been reported.
  • Comment removed for violation of Terms of Use ({0})
    Please create a username to comment on this article
    Username: