In the current market environment, it takes a much bigger nest egg to meet the same income goals compared to 30 years ago. In exhibit 1, we compare the investment value across multiple asset classes needed to generate a $40,000 annual income, today and in 1990. An investor relying on dividends from the S&P 500 would need more than $2.2 million saved today compared to $1.3 million in 1990, an increase of 69%. Fixed income investments are even more challenging in today’s low interest rate environment. A $500,000 portfolio of either 10-year treasuries or 6-month Certificate of Deposit (CDs) would have been sufficient to generate $40,000 in 1990. Yet today, those portfolios would need to be as large as $2.1 million or $7.8 million, respectively.
Current circumstances dictate the need for alternate sources of income – and this is where variable annuities may help. In exhibit 1 we can see that for a variable annuity with guaranteed income distributing 5%, an $800,000 investment could pay the same amount of income today as it would have in 1990. In our opinion, that potential to provide a consistent level of annual income is important in today’s rapidly changing world.
The challenges for retirees don’t stop at only needing a larger next egg. Uncertain market returns and decreasing yields mean that retirees face the risk of not having enough income in retirement to meet their lifestyle goals or even outliving their portfolio. Amidst these challenges, almost three-quarters of American workers say income stability is more important than maintaining wealth in retirement.5 Adding variable annuities may assuage these concerns by providing guaranteed income regardless of the interest rate environment or equity market performance, helping to extend the retirement runway.