P.T. Barnum is famously said to have opined that nobody ever went broke underestimating the intelligence of the American public. In a similar way, it’s hard to overstate how poor the financial press in this country — and most especially the monthly consumer magazines – is (despite some notable exceptions to the rule). It’s enough to make me want to scream for mercy.
In another tired re-cycling of the anti-fixed index annuity meme, Marla Brill offers the same ‘ol, same ‘ol criticisms and bromides (you can read about some of the issues at a higher level here and here). My thoughts on that topic will appear in the next issue of Research magazine and are outside the scope of my missive today, even though it seems to me that Brill ought to offer the other side of the story.
My comments today (and the object of my ire) relate to the closing lines of Brill’s piece, which are apparently offered as the last word in doing the right thing. Brill quotes Jerry Miccolis, chief investment officer at Brinton Eaton Wealth Advisors, apparently with respect to retirement income.
“For most people, even those who are already retired, a diversified portfolio is still the best way to stay ahead of inflation and generate income,” he says. “And if market volatility is a concern you can smooth the ride out by tilting your portfolio more toward bonds.”
I’m hopeful that Miccolis is merely stating his preference for such a portfolio to the deferred annuities Brill is criticizing and not ignoring the obvious benefits of immediate (income) annuities for retirement income. If so, Brill is placing his remarks out of context. At a minimum, Brill had a duty to provide the majority view of unbiased academic experts along with her view — especially in what purports to be a news story rather than an opinion piece. Kevin McCormally of Kiplinger’s Personal Finance makes a similarly silly mistake here.
Either way, had Brill done even a little bit of research, she would have recognized that portfolio approaches to retirement income do not deal with longevity risk and do not deal with sequence risk. Moreover, at current market levels, failure risk is extremely high. More importantly, by touting a portfolio approach to the exclusion of income annuities, Brill (and perhaps Miccolis too, even though I hope not) contradicts the full weight of academic authority (a presentation I recreated on this subject is available here). Unfortunately, such ignorance is common.
Representative examples of the best answers for retirement income — from prominent academics who are hardly unscrupulous insurance agents seeking commissions — follow.
- “Lifetime income [products] may not be the perfect financial instrument for retirement, but… they dominate anything else for most situations.” Babbel, “Lifetime Income for Women: A Financial Economist’s Perspective,” Wharton Financial Institutions Center (August 2008).
- “To achieve a similar riskless guarantee of income throughout one’s uncertain lifetime without life annuities would cost between 25% and 40% more.” Babbel & Merrill, “Rational Decumulation,” Wharton Financial Institutions Center (May 2007).
- “[T]he market for privately purchased individual [income] annuities in the United States is very small,” which represents a “remarkable disconnect between theory and practice” because income “annuities ought to play an important role in the portfolios of elderly households.” Brown, “Life Annuities and Uncertain Lifetimes” National Bureau of Economic Research, NBER Reporter (Spring 2004).
- “Lifetime income annuities may not be the perfect financial instrument for retirement, but when compared under the rigorous analytical apparatus of economic science to other available choices for retirement income, where risks and returns are carefully balanced, they dominate anything else for most situations. When supplemented with fixed income investments and equities, it is the best way we have now to provide for retirement. There is no other way to do this without spending much more money, or incurring a whole lot more risk coupled with some very good luck.” Babbel, “Lifetime Income for Women: A Financial Economist’s Perspective,” Wharton Financial Institutions Center (August 12, 2008).
- “For all time periods and for all portfolios, the addition of the annuity leads to a decline in the portfolio failure rates.” Ameriks, Veres & Warshawsky, “Making Retirement Income Last a Lifetime,” Journal of Financial Planning (December 2001).
- “If…the Social Security program will not generate sufficient income to satisfy minimal consumption needs, then it should be supplemented with the purchase of high-grade private annuities.” Babbel & Merrill, “Rational Decumulation,” Wharton Financial Institutions Center (May 2007).
- “Without additional guaranteed lifetime income streams…, middle-income Americans are at high risk of outliving their financial assets and living their final years in poverty.” Ernst & Young, “Retirement Vulnerability of New Retirees,” Americans for Secure Retirement (June 2009).
- “I have reviewed over 70 academic studies that have appeared since 1999, analyzing lifetime income annuities vs. other alternatives, and coauthored another major study. …The consensus of the literature from professional economists is that lifetime income annuities should definitely play a substantial role in the retirement arrangements of most people. How great a role depends on a number of factors, but it is fair to say that for most people, lifetime income annuities should comprise from 40% to 80% of their retirement assets under current pricing. Generally speaking, if a person has no bequest motive, or is averse to high risk, the portion of wealth allocated to annuities should be at the higher end of this range.” Babbel, “Lifetime Income for Women: A Financial Economist’s Perspective,” Wharton Financial Institutions Center (August 12, 2008).
If quoted accurately, what Miccolis said is common. If a retiree annuitizes, the advisor doesn’t get paid much and loses control of the money. And Miccolis isn’t obligated to provide alternative approaches, no matter how misguided his may be. Brill, on the other hand, surely does.
This isn’t rocket science. Really, we all deserve better from the financial press.