The silver lining of the stock and bond markets this year

Sometimes a little can be more.

Just take what happened to the annuity rates during this year’s bearish stock and bond markets. Although the dollar value of stocks and bonds has declined significantly, each of those dollars is now able to buy larger annual payments.

In fact, depending on the specifics of your situation, these two influences will largely offset each other. The net effect is that despite this year’s bear market, you are in as good a position as you were at the top of the market at the beginning of this year.

These countervailing forces should help us all be more optimistic about market volatility. For a sick wind that blows no good.

The accompanying chart shows how premium payment rates are closely related to interest rates on investment grade corporate bonds. When those rates were at multi-decade lows two years ago, a 65-year-old single man willing to pay a $100,000 premium would have earned an annual compensation payment of about $450 a month. Today, with interest rates significantly higher, that $100,000 premium can buy an annual compensation payment of about $570 per month — about 27% more.

(These numbers are from An annual pension for life and 10 years. This annuity provides a guaranteed lifetime income to the annuity holder, but if the annuity dies within the first ten years, payments to the annuity’s heirs continue for the remainder of those ten years. Also note that the payout rates in the graph are based on averages from different insurance companies, so depending on which company you choose, your rate may be better or worse. Moreover, your rate of return also depends on the state in which you live. Although the female annuity payment rates differ from the male rates, I would come to the same conclusion if I focused on the payment rates instead.)

kick yourself for nothing

Imagine that you are 65 years old and at the top of a bull market in early January you owned $100,000 of the S&P 500 SPX,
+ 1.84%
Funding, and instead of buying an annual salary of that amount, you chose to bet on the continuation of the bull market. Your index fund is now worth about $77,400, and you’re pushing yourself not to buy that annuity in early January.

But you’re kicking yourself for nothing. If you’ve hit the highest level in a bull market, your annual salary payment will be around $450. In contrast, with $77,400 you can secure a monthly return of close to $441 a month – or just 2% lower than the top of a bull market.

A pretty similar conclusion can be reached if you have a 60% equity/40% bond portfolio. Even though you have both stocks and bonds in your portfolio in bear markets, I suspect that instead of paying $450 a month you could have secured at the beginning of the year, your discounted portfolio value could buy you a monthly return of $456 today — about 1% more. (This account assumes that the bond portion of your portfolio is invested in an index fund such as iShares Core US Aggregate Bond ETF AGG,
+ 0.20%.

Things don’t always go that well

It is worth emphasizing that things do not always work out well. The most common pattern is for interest rates to fall during many bear markets, for example – which is why bonds often provide a cushion again for stock losses during bear markets. But note that when that happens, the annual payments you can buy go down along with the value of your equity holdings.

There is a lot of irony here. Many investors bemoan that this year is an exception to this normal pattern. Instead of bonds easing a bear market slump, this year they experienced a bear market of their own. And while this is undoubtedly annoying, it has a positive side to the higher annuity payments that you can buy for the same premium.

So be careful what you wish for.

Mark Hulbert is a regular contributor to MarketWatch. His Hulbert rating tracks investment newsletters that pay a flat fee to review. He can be reached at

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