Variable Annuities: From Controversial to Mainstream Using a Two-Bucket Strategy, Part 2

Bernicke, Ty A.
September 2007
Journal of Financial Planning;Sep2007, Vol. 20 Issue 9, p72
Academic Journal
This is the second of a two-part paper challenging 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. Part I (August 2007) introduced and described the general philosophies of the conventional mutual fund approach versus a two-bucket variable annuity strategy which shifts a portion of an investor's stock market risk for an extra cost to a variable annuity with lifetime withdrawal benefits. Part I also outlined the specific rules and definitions surrounding the research. Part 2 systematically back tests the alternative two-bucket strategy against the lower-cost traditional mutual fund strategy over every 30-year time horizon from 1926 through 2004. The results show that the two-bucket strategy with a variable annuity achieved an 18 percent higher average income and a 369 percent greater average inheritance with the assumptions tested. These findings might alleviate some of the negative stigma surrounding variable annuities based on previous controversial benefits that many financial advisors feel do not justify the extra costs. This research introduces an alternative strategy that investors and advisors can use to transfer stock market risk, potentially maximizing income and leaving a larger inheritance for one's beneficiaries.


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