David Stone Weighs In on Morningstar’s Annuity Conclusions

Are the Assumptions in Morningstar’s Report Valid?

In a recent report, data and research firm Morningstar concluded annuities aren’t meaningfully useful to 95% of affluent investors. A report that casts doubt on the value of an entire class of insurance products will inevitably get a response, which is where finance writer Oisín Breen comes in. In his article on RIA Biz, Breen takes Morningstar to task not for their conclusions, but for the math they used to reach those conclusions and the assumptions that math is built on.

Among the assumptions Morningstar seemingly makes are that these individuals will gain substantial income from Social Security or a pension:

“Annuities aren’t that beneficial for participants for whom Social Security or an inflation-adjusted pension provides a high level of income,” writes Spencer Look, Morningstar associate director for retirement studies and public policy.

Both protect against market and longevity risk, he adds.

“Higher-wealth participants can more or less self-insure,” according to the report, co-authored by Aron Szapiro, Morningstar head of retirement studies and public policy.

Of course, it takes money (and assets) to dismiss insurance out of hand to protect future income.

Breen called on a number of annuity experts, including RetireOne CEO and co-founder David Stone, to provide a counterpoint to Morningstar’s conclusions.

“There’s a bit of nonsense in play here … we see higher-net-worth investors utilizing annuities not so much to prevent running out of money, but to ensure a certain standard of living that cannot be diminished,” says RetireOne founder and CEO, David Stone, via email.

Besides, annuities can be instrumental in maximizing the benefits from Social Security, the annuities marketplace CEO adds.

“An annuity [can] supplement the bridge period from when a person stops working through the period during which they maximize social security benefits by delaying.

“This isn’t an ‘either or’ scenario …’”

Breen also points out that the Morningstar report “presumes that Social Security’s solvency and cash flow are as certain as the moon’s rotation around the earth.” The article continues:

Stone argues that advisors can see for themselves that the whole system is headed for a test based upon a 2022 report that shows the surplus in social security trust funds running dry by 2035 – without a big government intervention, according to Stone.

To their credit, Morningstar didn’t refute this statement, and are evidently working on a second report about consequences for advisors when Social Security no longer provides the level of guaranteed income it does today. As Morningstar’s Spencer Look says in the article, “If retirees’ level of guaranteed income from Social Security goes down, there will likely be more room for annuities.”