Data & Research January 16, 2008

Study Says Variable Annuity Works Well in Retirement Portfolio

Investors who add a variable annuity with a lifetime guaranteed minimum withdrawal benefit (GMWB) to a stock and bond retirement portfolio can enjoy pumped up income with less risk, a new study finds.
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That was the finding of a study by Ibbotson Associates that examined the risk of a declining income and a potential income shortfall, according to a news release.

Ibbotson conducted a series of simulations focusing on three investment scenarios:

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  • a diversified asset allocation variable annuity with a GMWB,
  • a diversified traditional non-annuity portfolio, such as mutual funds, and
  • a combination of a variable annuity with a GMWB and traditional non-annuity products.

According to the Ibbotson announcement, empirical results using historical returns and Monte Carlo simulations showed the combined portfolios had higher average total income return and total income withdrawals as well as lower negative income return over a 30-year retirement period than did the traditional portfolio.

The guaranteed income protection in the GMWB allows the investor to allocate assets to a more aggressive variable annuity, leaving the overall portfolio with a higher equity allocation.

A GMWB rider for life gives investors the ability to withdraw a fixed yearly percentage of the benefit base until death. The benefit base can rise annually when the market has performed well, but will not fall, Ibbotson said.

“Americans are becoming increasingly dependent on their own savings to finance longer retirement horizons, and they need advice, tools, and products to help them and their advisors develop portfolios that mitigate both market risk and retirement income shortfall risk,” said Peng Chen, president and chief investment officer of Ibbotson Associates, in the announcement. “This study is a continuation of our work to provide guidance on how best to combine traditional investment vehicles with annuities to enhance and help secure income over an investor’s life span.”

The research paper, “Retirement Portfolio and Variable Annuity with Guaranteed Minimum Withdrawal Benefit,’ was sponsored by Nationwide Financial Services and can be viewed here.

The Markets January 16, 2008

Garden State Pension Plans Takes Citi, Merrill Equity Stakes

Causing a stir among Wall Street pundits, the state of New Jersey’s $80-billion pension plan will take equity positions in both Citigroup and Merrill Lynch&Co. – both suffering mightily from their subprime mortgage holdings.
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According to various news reports, including a New York Times Wall Street blog, the Garden State will invest $400 million in Citigroup and $300 million in Merrill Lynch by buying convertible preferred shares in the two beleaguered financial services firms. The New Jersey Division of Investment also bought a small piece in Merrill’s convertible-stock offering, according to the press accounts.

Many Wall Street firms, battered by billions in subprime mortgage losses, have been scrambling recently to raise cash around the world. Trying to explain the state’s investment move, the reports said the mandatory convertible securities carry a coupon of 7%, although they also have a conversion premium of 20%.

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Not only that, but the reports pointed out that pension officials have been scrambling to pump up returns through hedge funds and private equity investments. So a move like New Jersey’s “could prove profitable enough to take a risk on,” the Times investment blog asserted.

A MarketWatch report also pointed out that the state has a vested interest in keeping Citi running smoothly since so many Garden State residents work for the company and several Wall Street firms have operations in New Jersey cities like Hoboken and Jersey City.

Finally, according to the media reports, Governor Jon S. Corzine is an old Wall Street hand, being the former Goldman Sachs chairman and chief executive officer.

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