Roger Ibbotson, economist and creator of the “Stock, Bonds, Bills, and Inflation” (SBBI®) chart, in March 2018 unveiled his latest research that analyzes the emerging potential of Fixed Indexed Annuities (FIA) as an alternative to bonds in retirement portfolios.

Researched and written by Ibbotson and his team at Zebra Capital Management, the white-paper, Fixed Indexed Annuities: Consider the Alternative, suggests bond returns in today’s historically low interest rate environment may be insufficient in meeting the anticipated retirement needs of U.S. investors, potentially placing many at risk of outliving their retirement savings.

A celebrity among financial analysts, Ibbotson is a 10-time recipient of CFA Institute’s Graham & Dodd Awards for financial research excellence and a professor emeritus at the Yale School of Management. In 1979, his research on risk premiums changed the trajectory of the financial industry, demonstrating the relationship between risk and return and illustrating equities are needed in a portfolio in order to generate long-term growth.

Today, Ibbotson’s latest research demonstrates that uncapped FIAs help control equity market risk, mitigate longevity risk, and have the potential to outperform bonds in the near future.

“What financial advisors should acknowledge is the immense impact that shifting market conditions, longer life expectancies, and uncertainties surrounding the future of Social Security have made on our U.S. economy,” said Ibbotson. “In recent years, we recognized the potential of these conditions to result in a perfect storm where investors may be left with insufficient funds to carry them through retirement.”

“Conventional wisdom has most investors de-risking their portfolios by allocating more heavily to bonds as they approach retirement,” continued Ibbotson. “However, investors should consider other alternatives such as FIAs. In this low interest rate environment, complacency can be a danger to our clients’ futures.”

In collaboration with Annexus, the researchers utilized S&P 500 Index’s dynamic participation rates to simulate FIA performance over the past 90 years. The subsequent data, which considered historical volatility, interest rates, and dividend rates, indicated:

1. Uncapped FIAs would have outperformed bonds on an annualized basis for the past 90 years.
2. It is highly unlikely bond investors will realize as high a return from capital gains in the coming 10 years as they have realized in the past 10 years. In fact, if rates rise, capital gains in the future will be negative (capital losses).
3. Uncapped FIAs offer a more tailored risk profile than bonds, capturing a portion of the growth offered by large-cap stocks, while lowering overall market risk.

More detailed findings, as well as a full methodology, can be found in the Ibbotson and Zebra Capital Management whitepaper, Fixed Indexed Annuities: Consider the Alternative.