Cecily O'Connor
RedwoodAge.com

Buying a fixed-income annuity, either gradually or all at once, can provide more liquidity and wealth than other retirement income strategies.

That's according to a MassMutual study that tested four approaches for managing a retirement income account over 181 cases between 1965 and 2007. It found that three strategies involving an income annuity, whether purchased all at once or over time, generally out-performed the stock and bond-only strategy, regardless of market conditions in the periods studied.

As a result, the authors of the study determined that a portfolio mixing stocks, bonds, and incremental purchases of annuity benefits over time - a "retirement annuity laddering" process - produces more guaranteed lifetime income, develops more liquidity to address other retirement needs, and builds greater long-term wealth than other  retirement income strategies.

Annuities are among most complex financial products boomers will encounter as they plan their retirement. Even so, many are starting to take a closer look at these products, given concerns about guaranteed retirement income. 

Most financial planners will caution that annuities are not one-size-fits-all financial vehicles, but depending on one's circumstances, they could help supplement income at a time when the future of Social Security and Medicare is unclear. 

Income Concerns
Fixed-income annuities are essentially insurance products in which investors make a lump-sum payment or series of payments, and the money grows tax-deferred at a guaranteed or fixed rate. The annuity provider then makes periodic payments to the investor, either for the rest of your life, or for a specified period of time. 

The study tested the performance of various asset allocations within a hypothetical $100,000 retirement account tested to produce the same targeted level of annual retirement income over 181 twenty-seven-year investment periods at monthly starting dates from 1965 through 1980.

Overall, MassMutual - which markets annuities - found the gradual purchase through annuity laddering is an effective method, matching the income goal in 100 percent of cases tested. Even during strong equity and bond markets, the investment-only approach ran out of money in 25 percent of cases.

The laddered strategy was more successful as preserving the original deposit, maintaining the money in 93 percent of the cases, compared to 45 percent for the stock- and bond-only approach.

"The study suggests that making laddered purchases into an income annuity can provide guaranteed income while still making funds available to the retiree to address non-income needs, such as medical expenses or gifting," said Jerry Golden, president of MassMutual's income management strategies division. 

Purchase Predicament
Still, deciding when to purchase the income annuity, either all at once or gradually, can be crucial in certain market conditions and can vary based on an investor's comfort level.

Gradually increasing the guaranteed income component through annual purchases of additional fixed-income annuities can: smooth out interest rate spikes or dips in the early years of retirement; enable retirees to purchase fixed-income annuities at older ages with the possibility of increased income payout rates; and provide flexibility to adjust purchases should their financial circumstances change. 

To be sure, boomers would be wise to talk to a financial planner before buying any type of retirement product to ensure it fits their long-term goals. The National Association of Insurance Commissioners outlines on its website 10 important considerations to mull before diving into an annuity. This includes questions to ask agents, knowing how the interest rates are set, what charges might be subtracted from the annuity and the effects on taxes.