The deeper I got into research on sustaining retirement income the more I wondered how an insurance company could offer and sustain their promised income benefits? The answer it seems is that they can’t.
This article by Alan Levine in Wealth Management titled Uh, Sorry…Can We Have That Back? | Insurance content from WealthManagement.com explains what insurance companies are doing with variable annuities now. Essentially they have discovered their products were too rich and the insurance company may not be able to afford the benefits promised. Thus, they are offering to change the contract with owners.
Should you bite? That depends. The current benefits may provide more income compared to a new offer. However, the question is, will the insurance company be able to afford the better benefits and stay in business. It does little good holding out for a higher paycheck if the company goes bust (you end up with nothing in that case). On the other hand, can you adjust your budget for a smaller paycheck that may have better odds the company can stay in business because they are paying out less?
Not to toot my horn, but I saw this coming the deeper I got with my research.
I took an informal snapshot comparing immediate annuity payouts to periodic withdrawals from a portfolio based on my peer-reviewed research published in the Journal of Financial Planning. The results (first link in this paragraph): The payouts from annuities compared with pessimistic market returns. If the markets provide better returns than below average over the rest of your lifetime, then staying invested (outside of an annuity contract) may give you the better opportunity for better income.
Afterall, the insurance companies invest in the same markets that mutual funds do. There are no special markets for either. This comes down to how you choose to manage the risks in life.