The silver lining of this year’s stock and bond bear markets

Sometimes less can be more.

Just take what happened to annuity rates during this year’s stock and bond markets. While the dollar value of your stock and bond holdings has dropped significantly, each of those dollars can now buy a larger annuity payment.

In fact, depending on the specifics of your situation, these two effects will largely offset each other. The net effect is that, despite this year’s bear market, you’re just as good off as you were at the top of the market at the start of this year.

These counterforces should help us all be more optimistic about the fluctuations of the markets. It’s a bad wind that doesn’t blow well.

The accompanying chart illustrates how annuity payout rates are closely related to investment-grade corporate bond interest rates. When those rates hit rock bottom a few years ago, a 65-year-old single man willing to pay a $100,000 premium had secured an annuity payment of about $450 a month. Today, with significantly higher interest rates, that same $100,000 premium could buy an annuity payment of about $570 per month — about 27% more.

(These figures are from ImmediateAnnuities.com for a “life and 10-year secure” annuity. Such an annuity provides a guaranteed lifetime income for the annuitant, but if the annuitant dies within the first 10 years, payments continue for the rest. to the heirs of the annuitant for those 10 years. Also note that the payout percentages in the chart are based on averages from different insurance companies, so depending on the company you choose, your rate may be better or worse. In addition, your payout percentage will also vary Although annuity payout rates are different for women than for men, I would come to the same conclusion if I focused on their payout rates instead.)

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Kicking yourself for nothing

Imagine you are a 65 year old male and at the peak of the bull market in early January you owned $100,000 of an S&P 500 index SPX,
+2.09%
fund and, instead of buying an annuity with that amount, you chose to bet that the bull market would continue. Your index fund is now worth about $77,400, and you’re kidding yourself for not buying that annuity in early January.

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But you’re kicking yourself for nothing. If you had an annuity in the high market, your monthly annuity payout would be about $450. With your current $77,400, on the other hand, you could secure a monthly payout of about $441 a month – or only about 2% less than at the top of the bull market.

A largely similar conclusion would be reached if you had a 60% stock/40% bond portfolio. While both your portfolio’s stock and bond portfolios are in bear markets, I calculate that instead of the $450 monthly payout that you could have secured at the beginning of the year, today your diminished portfolio value is a $450 monthly payout. 456 – about 1% more. (This calculation assumes that the bond portion of your portfolio is invested in an index fund such as the iShares Core US Aggregate Bond ETF AGG,
+0.14%.
)

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It doesn’t always go so well

It’s worth emphasizing that things don’t always go so well. For example, the more common pattern is that interest rates fall during many bear markets, which is why bonds often provide a buffer for stock losses during bear markets. But note that, when that happens, the annuity payout you can buy drops along with the value of your stock holdings.

There’s a lot of irony here. Many investors complain that this year is an exception to that normal pattern. Rather than dampening the bear market, bonds have had a bear market of their own this year. And while that’s undeniably disturbing, it does have the silver lining to increase the annuity payout you can buy for the same premium.

So be careful what you wish for.

Mark Hulbert is a regular contributor to MarketWatch. His Hulbert Ratings keeps investment newsletters that pay a fixed fee to be audited. He can be reached at [email protected].

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