In today's Wall Street Journal there was a nice article on "The case for Income Annuities", written by Jeff D. Opdyke and discussing a soon to be released study by the University of Pennsylvania's Wharton Financial Institutions Center that makes a very compelling case for the use of income annuities.
The report, co-authored by avid F. Babbel, and insurance and risk management professor at the Wharton School and Craig B. Merrill, an insurance and financial professor at BYU, looks at the situation faced by most American's as they approach retirement and attempt to plan their income needs for the balance of their lives. The study focuses on how most financial planning models tend to lean on the assumption that the "average person" who is looking at retirement income needs from age's 65 to 85, with the average life span for most 65 year olds being 20 years to age 85. However, as the article and study will point out, the fact that age 85 is average means that over half of all people will live past age 85, and in some cases well past 85, which if too much money has been withdrawn from investment accounts could lead to a situation where they have run out of money at exactly the time at which they need it most.
Additionally they come to the conclusion that the immediate income annuity is the only asset class that effectively addressed the mortality risk of out living your nest egg or starting account value, as it generates a permanent steam of income for life, with the mortality risk transferred to the life insurance company providing the annuity. Furthermore they concluded that funds in mutual funds " are subjected to greater risk, typically higher expenses and returns that are unlikely to keep pace with annuity returns, when investment risk is taken into account."
Of course none of this will come as news to those of us in the business of using structured settlement annuity contracts to finance the long term needs of injury victims, attorney fees and surviving spouses. The key feature has always been the ability to transfer the risk of running out of money to the insurance company in return for a competitive guaranteed income that lives as long as you do.
If you are an injury victim, trial lawyer, settlement professional or someone contemplating retirement you should make a point of getting a copy of this analysis. As soon as it is published i'll be sure to put a link to it here on The Settlement Channel.
The bottom line is that the academic world is starting to come around to what we have always known, that being that there is no other means by which the vast majority of retirees, disabled and injured can insure that they will have a lifetime, guaranteed income that is not subject to investment risk or over spending other then a fixed income annuity contract.