Are Fixed Indexed Annuities More Efficient Than Bonds?

Allan RothA recent paper by retirement researcher, Wade Pfau, had two fascinating conclusions.

  • In accumulation mode, a portfolio comprised of stocks, fixed-indexed annuities (FIAs), and (sometimes) bonds offered a more efficient risk-return tradeoff than stocks and bonds alone.
  • In withdrawal mode, stocks and FIAs offered a far greater withdrawal rate than a portfolio constrained by stocks and bonds alone. Bonds had no role.

The paper entitled “Protection as an Asset Class” was published by the Alliance For Lifetime Income, a non-profit 501©(6) educational organization based in Washington, D.C. I’ve known Pfau for many years and have the utmost respect for him. I’m always looking for safer strategies for accumulation and, especially, decumulation. I investigated this research and interviewed Pfau. My concentration was on the use of FIAs in portfolios rather than whether they were a separate asset class from stocks or bonds.

FIAs in accumulation

An FIA is a contract between the annuitant and an insurance company where the return is based on the performance of a chosen stock market index or indexes. With FIAs, the principal is guaranteed. In the paper, Pfau uses an FIA linked to the S&P 500 price index (excluding dividends, which he discloses) with a cap rate of 12%. With these terms, the FIA will earn between 0% and 12% each year. It will not have a loss which, as Pfau points out, both stocks and bonds had in 2022. He told me these terms were similar to many FIAs but not based on any specific product.