Adding a fixed income annuity to a retirement income account can yield greater long-term wealth and more income security than a portfolio of equity and bond investments alone. This finding, from a study by MassMutual Financial Group, could have a significant impact for retiring Baby Boomers.

The researchers tested the performance of a number of asset allocations within four hypothetical $100,000 retirement accounts over a 27-year investment period from January 1, 1980 to December 31, 2006. Each account was expected to produce the same $10,597 in annual income using a different configuration and allocation of assets. The annual income amount was chosen because it equaled the amount of annual income that could be expected from investing in a series of 10-year U.S. Treasuries over the 27-year study period. The 27-year time frame is considered the length of time the average 65-year-old person can expect to be retired.

After examining the performance of the four accounts, the researchers discovered that:

· Account A, which had no fixed income annuity component and was made up of 50% U.S. equities and 50% U.S. bonds, had a liquid value of $489,346, nearly five times the original $100,000 deposit, at the end of the 27-year study period.

· Account B was made up of the same 50/50 allocation as Account A. However, 33.3% of the bond portion of the investment portfolio was used to purchase a life-only fixed income annuity. At the end of the 27-year period, the account had a liquid value of $667,688, almost seven times the original deposit.

· Account C was made up of 50% U.S. equities, 30% U.S. bonds and a life-only fixed income annuity, which accounted for the remaining 20% of the portfolio. There were also additional fixed income annuity purchases in the second through seventh years. At the end of the 27-year period, the account had a liquid value of $735,292, more than seven times the original deposit.

· Account D had the same initial asset allocation as Account C; however, the payout method for all fixed income annuity purchases was life with 20 years certain. This type of payout not only protected the beneficiaries in the event of an early death of the investor, but at the end of the 27-year period, it helped the account attain a liquid value of $546,200, more than five times the original deposit.

The data clearly suggests that the optimal design for a retirement account includes equities, bonds and fixed income annuities. It also indicates that retirees could create greater wealth, lessen risk and have more flexibility by making purchases of additional annuity income benefits over time and incorporating them into their retirement portfolio.

* Annuity withdrawals are generally taxed as ordinary income and may be subject to surrender charges, in addition to a 10% federal income tax penalty if made prior to age 59 1/2. The guarantees and payments of income are contingent on the claims paying ability of the issuing insurance carrier.

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