Variable Annuities: From Controversial to Mainstream Using a Two-Bucket Strategy, Part 1

Bernicke, Ty A.
August 2007
Journal of Financial Planning;Aug2007, Vol. 20 Issue 8, p52
Academic Journal
• This two-part article challenges conventional wisdom that suggests investors allocate their portfolio with lower-cost investment products that diversify unwanted stock market risk by allocating monies to fixed accounts and bonds. • This article systematically back tests an alternative two-bucket strategy that shifts a portion of an investors stock market risk for an extra cost to a variable annuity with lifetime withdrawal benefits. • After back testing the two-bucket strategy with variable annuity against a lower-cost traditional mutual fund strategy over every 30-year time horizon from 1926 through 2004, the study found that the two-bucket strategy achieved approximately 18 percent higher average income and approximately 369 percent greater average inheritance with the assumptions tested. • These findings might alleviate part of the negative stigma surrounding variable annuities based on previous controversial benefits which many people, including financial planners, feel do not justify the extra costs. • This research introduces an alternative strategy that investors and advisors can use to transfer stock market risk which could help maximize income and leave a larger inheritance for one's beneficiaries. • The study and its findings are presented in two parts. Part I introduces and describes the general philosophies surrounding the mutual fund approach and the two-bucket strategy. It also sets specific rules and definitions surrounding the research. Part 2 illustrates the results of the study, further implications, and research limitations.


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