How people think about investing for retirement has changed. It’s no longer enough to sit across your advisor’s dark mahogany desk discussing how to tweak the tried-and-true risk-reduction formula. “Joe, you’re getting closer to retirement; let’s drop your stock-to-bond ratio from 70/30 to 60/40.” “Sure, Fred, that sounds good.”
Years of artificially low interest rates have skewed the returns on bonds. And – after many years of reassuring bull markets – the disruption of recent bank failures has made the markets feel far riskier.
When unexpected inflation was added to the list of concerns in 2022, advisors saw clients’ interest in annuities grow. These insurance products that generate a pension-like income in retirement tend to sell better in times of uncertainty. Yet, although 2023 began with slightly lower inflation and rebounding markets, the relative stability of annuities – particularly fixed-rate and fixed-indexed annuities – continued to appeal.
According to LIMRA, an industry-funded group that tracks such products, the first quarter of 2023 saw sales reach $92.9 billion, 47% higher than that quarter in 2022. And, while growth may not continue at that pace, there’s no doubt that investors are looking for ways to balance protection and growth.
Let’s take a look at two longevity hedges – the traditional annuity and Savvly’s personal pension. If you’re looking for regular income, inflation protection, and cash value preservation, combining the two might be the best of both worlds.
The downsides of annuities
As appealing as annuities might seem, they’re not without inherent risks and costs. For example:
• Annuities carry direct counterparty risk if the issuing insurance company should become insolvent since the insurance company holds client funds in the annuity.
• Fees for some annuities can reach several percentage points per year between annual fees for managing the annuity and for any underlying mutual funds.
• Annuities typically offer limited inflation protections unless you purchase a rider for an extra fee.
• Annuities can require a significant portion of your portfolio to generate sufficient income in retirement since the payout is linked to market performance alone.
• The value of annuities grows slower than the market because they’re hedged against market drops.
• As cash payouts are made, the cash value of investments drops quickly during the annuitization.
• Proceeds are typically taxed as ordinary income.
• Should you die early, before benefiting from your investment in an annuity, funds are forfeited to the underwriting company unless you purchase a rider.
Can annuities be supplemented to minimize the downsides?
The key to supplementing annuities in a retirement portfolio is to find an instrument that provides complementary benefits in addition to protection and growth.
Savvly is such an instrument. And what is Savvly?
Savvly provides a private risk-pooled retirement solution that acts as a personal pension for late-life financial security. The pool is comprised of many investors and their contributions. Pool monies are invested in a low-cost, market-tracking ETF. The market determines pool performance, and growth is returned over time. Investors choose one or more payout dates sometime after their mid-70s, at which time they receive their share of the pooled fund’s value at that moment. Scheduled payouts can be timed to replenish their cash account to finance the later phases of their lives.
Investors agree in advance that if they pass away or withdraw before reaching their payout age, they or their estate receive most of their original contribution. However, their market gains remain in the pool and are reallocated to those investors still in it. This allows the payout to exceed the market return on the ETF.
The upsides of Savvly
Savvly offers several benefits that can minimize or neutralize some of the downsides of annuities. For example:
• Savvly adds no credit risk because it functions solely as a manager: you own shares in a limited partnership with a specific percentage of the pool’s underlying assets. You retain ownership of your original contribution and its market performance.
• Savvly’s fees are low, in the 35-50 bps range, including ETF management fees.
• Savvly offers indirect inflation protection: the major market indices that underpin Savvly’s pools are likely to integrate the inflationary pressures experienced in the economy.
• With Savvly, allocating as little as 5-10% of retirement assets should suffice, but it depends on your age, payout date(s) and desired cash payout.
• The value of the pooled fund grows in keeping with the market, as there is no deduction for hedging against market drops.
• Because no intermediary cash payouts are made, the cash value of your total contribution can grow.
• Savvly’s distribution is in the form of shares, taxed as long-term capital gains when liquidated. If held until death, shares also benefit from a stepped-up basis which provides a tax benefit to your heirs.
• Since Savvly typically represents 5-10% of your retirement assets, early withdrawal in case of early death is less significant. Also, because of pooling, early withdrawal means higher returns for surviving fund participants, which could mean you.
What Savvly means to your heirs
The differing structures behind annuities and Savvly affect what you leave your heirs. A long life means nothing to your beneficiaries in the case of annuities, even those with a death benefit, as the accumulation value declines over time. But with Savvly, the longer you live, the greater the likelihood of a large inheritance.
Here’s why: if you pass away before your payout age, your beneficiaries receive more of your original investment with each passing year you’ve been with Savvly. Then there’s the long-life bonus from the Savvly pool. All market returns from those who pass away or withdraw before their payout age are reallocated among Savvly pool investors. So, the longer you stay in the pension pool, the greater the possible accumulation value of your shares – and the more that is available for your heirs.
Combining annuities with Savvly
Most investors choose annuities because they worry they will lose money in the markets and seek regular monthly income to supplement their Social Security checks. Savvly’s investors choose its risk-pooled retirement plan because they want to make the most of their retirement dollars and live life fully, knowing they have replenishments along the way.
Combining Savvly with an annuity creates a new and unique market proposition with the highest level of security: you can enjoy both market benefit and guaranteed income in your later years.