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Morningstar posted an article by Allan Roth (an investment writer just in the past year) this morning.
He writes the delaying Social Security until 70 and buying a US Treasury TIPS ladder are risk free inflation adjusted alternatives to purchasing an annuity through an insurance company who’s payments generally are not..
https://www.morningstar.com/funds/hidden-risks-income-life-target-date-funds?utm_source=eloqua&utm_medium=email&utm_campaign=MorningDigest&utm_content=None_75089&MorningDigestUS&utm_id=39201
Enjoy
I recognize that financial planning isn’t a one size fits all strategy. I assume we all accept that reality. I’m no fan of annuities and my calculations say they are a bad deal for most. However, the peace of mind that it gives some cannot be underestimated.
I’d never buy one because as Roth states, I can create my own income streams at a much lower cost while retainingcontrolof my money. Some people may think an annuity is beneficial to them and it’s the job of the advisor to point out all the options available and help them chart the best course. All that said, I understand the point made by Roth but I have no issues if folks want annuities if it makes them sleep better at night.
There’s a bit of smoke and mirrors here. Roth leans heavily on the idea that annuities are just returning your capital, which is true, but then recommends a 30-year TIPS ladder that does exactly the same thing. He even admits it himself.
Also, what if you’re not average? What if you live to 101 and your ladder finishes at 95? Are you supposed to live on thin air?
His alternatives are most likely good advice…for someone who’s financially literate and asset-rich. There’s also the point that Roth is a CPA who can build a 30-year bond ladder in his sleep. I’d suggest the average 401(k) participant cannot, and I’ve read the whole point of embedding annuities in target-date funds is simplicity for ordinary people.
To me, it reads like advice written by an affluent author for other high-net-worth individuals that’s been dressed up as general guidance.
If one’s retirement assets are such that 100% has to be invested either in an annuity or a 30-year TIPs ladder, then you must flip a coin between betting on inflation risk (the annuity) or longevity risk (the TIPs ladder) – an unfortunate dilemma.
But for many of us, we probably have the financial ability to devote something less than 100% of our wealth to either alternative. As Allan Roth suggests, for example, 90% could be put into TIPs and 10% could be invested in stocks and left alone to grow for 30 years while we live off level real income from our TIPs ladder and Social Security. We could also do the same thing with an annuity, but the problem is that we may need to tap into our stocks along the way to make up any shortfall due to declining real annuity income from inflation.
After conducting an analysis, I determined that both strategies would have fared much better historically than plunking 100% of one’s wealth into either an annuity or a 30-year TIPs ladder. However, the TIPs+Stocks strategy left one with residual wealth after 30 years that was significantly greater than the Annuity+Stocks option. In fact, if you started at age 65 you would have been able to maintain level real spending until you were older than 105 before that strategy failed – assuming the inflation rate and stock returns that have prevailed since 1972. My money is on the TIPs ladder accompanied by an equity investment sleeve. I’m willing to bet that I won’t live past 105 more than I’m willing to bet on what inflation is going to be over the next 40 years.
William, that TIPS-plus-equity-sleeve model is a beautiful piece of financial engineering. I’m sure the math absolutely backs you up.
But I still have to circle back to the ‘Average Joe’ reality.
For the folks on this forum, constructing a 30-year individual TIPS ladder and systematically rebalancing a separate equity sleeve over three decades sounds like an engaging weekend project. For the general public, it’s a wall of complexity. The moment you tell an average 401(k) participant they need to buy individual inflation-linked bonds at auction, manage phantom taxes, or risk duration exposure with ETFs, you’ve lost them.
This is why embedded annuities in Target-Date Funds exist. It isn’t because they are mathematically superior to a perfectly optimized, DIY portfolio. It’s because they solve for simplicity and behavioral discipline. A lower-yield, institutional safety net that actually gets implemented will always outperform a flawless, multi-variable strategy that a stressed retiree fails to build in the first place.