Page 18 - The Great 401k Rip-Off

two to three times the income, guarantees it for a lifetime, and which is so solid no one has ever lost
a dime?

I think it’s because when that money leaves the market it never ever goes back, and as Boomers
retire at the rate of 10,000 a day, and as they learn the truth, and billions of dollars a year flow out of
the market and into annuities, Wall Street sees the party coming to an end. I believe they see it as an
existential threat.

However, some in the industry are finding religion. The Wall Street Journal reports,

Income annuities can assure retirees of an income stream for life at a cost as
much as 40% less than a traditional stock, bond and cash mix.” [20]

In other words, retirees who need a nest egg of, say, $1 million, can live the same lifestyle with as
little as $600,000 or less, in an annuity.

Prof. David Babbel of The Wharton School writes:

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.

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. [21]

Annuities – specifically fixed annuities – provide a powerful foundation for any portfolio and are
crucial for providing guaranteed retirement income in an efficient manner. Good financial planning
demands that we use them routinely for income generation.

Specifically they provide three very clear advantages.

1. They are insurance instruments. No one can plan for death and other catastrophic events better
than insurance actuaries. It’s what they do. Day in and day out they predict with scientific accuracy
how many people are going to live and how many are going to die. Furthermore, they predict when,
and how people will live and die. So, by definition, if you are trying to come up with a plan to
determine how long you will live and how much money you can spend while alive, who better to help
you than an insurance actuary?

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