A recent study, co-sponsored by the Wharton Financial Institutions Center at the University of Pennsylvania and New York Life Insurance Company, reveals that lifetime income annuities are the most cost-effective and least risky investment for creating guaranteed retirement income for life. The findings are described in a paper entitled Investing Your Lump Sum at Retirement, co-authored by Professor David F. Babbel of The Wharton School and Professor Craig B. Merrill of The Marriott School of Management at Brigham Young University. Their research explores various financial options for retirees in terms of their ability to generate maximum retirement income at the lowest cost.

Babbel and Merrill began their research because they believed that living too long is increasingly becoming the major financial problem of the 21st century. They were also concerned with the fact that too few people take advantage of annuities. Their research substantiates their belief that only lifetime income annuities can protect individuals in an efficient way from the risk of outliving their money. In addition, they also showed that individuals couldn’t achieve these same results with mutual funds, certificates of deposit, or what they describe as “other homegrown solutions.” The researchers concluded that income annuities should be more widely used, especially since insurance companies are reliable and inexpensive sources of guaranteed retirement income.

Here are some of the other findings that were outlined in their paper:

· Income annuities can provide secure income for one’s entire lifetime for 25-40 percent less money than it would cost an individual to provide a similar level of lifetime income through traditional means, thanks to an insurer’s ability to spread risk across large numbers of people.

· Equities, fixed income and other investment products like mutual funds carry the risk of outliving one’s nest egg.

· By covering at least basic living expenses with income annuities, consumers have much greater flexibility in other areas of a retirement plan, including the ability to take more investment risk with the remaining portfolio.

The researchers also concluded that most of the reasons why people avoided buying annuities in the past have been eliminated. Insurance companies have worked to modernize the product so that it includes features such as access to cash when needed, inflation protection, and the ability to leave an inheritance. Combine all of these factors and the evidence is overwhelmingly in favor of at least considering an income annuity as part of one’s retirement portfolio.

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