Capitalizing on the tax-deferral advantage of a variable annuity
Learn how sheltering investment growth in tax-deferred accounts over the long-term may result in more wealth for retirement.
Annuities: An Essential Slice of the Retirement Pie
Annuities have become an essential slice of the retirement pie for Americans approaching and living in retirement. As part of a retirement income solution, annuities also can be an ideal complement to other portfolios.
Dr. David Kelly and Katherine Roy
If you invite an actuary to a 65th birthday party-- I wouldn't actually recommend it-- but suppose you do that. And as you're blowing out the candles, you ask him, how long am I going to live? How many more times do I get to blow out the candles? The truth is he won't be able give you an answer.
The average person turning 65 today, if you average over gender and wealth and health, the average is about 21 years. So on average, you can expect to live to about 85 or 86. The problem is that there's a 5% chance that you'll live to age 96 or above.
And so he won't know the answer to that. But if you ask him instead of the 10,000 other people who are celebrating a 65th birthday today, how long will they live? Suddenly, he'll have the answer. Oh, it's about 21 years.
And that, in its essence, is the advantage that an insurance company has in using annuities to provide lifetime income. Because an insurance company can just average over average lifespans, while an individual has to be 95% sure that their money will last-- that they don't essentially outlive their money.
And that means that as an insurance company pays out, it can actually afford to pay out a bigger annual payment than an individual could pay themselves if they wanted to be sure they didn't run out of money. And that's the basic advantage of an annuity.
The second advantage that an annuity has over somebody who does it themselves is that you can average not just over different lifespans but actually over different market cycles. If you retire at the end of a bear market, that is actually a pretty good time to retire. Because as the market begins to move up again, the value of your portfolio may move up even as you pull money out.
But if you retire at the end of a bull market when stocks are very high, the danger is that stocks could fall enough in the first few years of your retirement that you actually run out of money. But an insurance company offering annuities can actually average over market cycles. So they are invested throughout your retirement, unlike the individual investor who will be pulling money out as a retirement proceeds.
In the past-- going back to 1950-- we've seen very good returns from both stocks and bonds. And that means that if you've been taking an income in retirement, either because you did it yourself or from an annuity, you could get a pretty good return on your money. But going forward, we believe that the returns on both stocks and bonds will be much more modest than they have been in the past.
That means that the extra income that you can get from an annuity-- because an annuity company can average over market cycles and doesn't have to worry about markets falling sharply at the start of retirement-- that extra money is that more important to a retiree today.
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Institutional use only-- not for public distribution. This call is being recorded. All or part of the audio portion, including the question-and-answer portion, may be used for JP Morgan purposes. If you do not wish to be included in the audio documentation, remain on the line in listen-only mode. I would now like to turn the conference over to Mr. Zach O'Connor. Thank you. You may begin.
Thank you and good afternoon. And thank you all for joining us here today. My name is Zach O'Connor, and I'm the Northeast Client Advisor for the JP Morgan Variable Annuity Sales Team. Today's call is going to be with Dr. David Kelly, Chief Global Strategist and Head of Global Market Insight Strategy Team, and Katherine Roy, the Chief Retirement Strategist and Head of Individual Retirement.
Together, David and Katherine will reinforce the importance of guaranteed income solutions in today's market environment, as well as discuss how annuities can play a key role in retirement planning. In regards to today's format, David's actually going to speak first, and provide his perspective on the current state of the global economy-- after which Katherine is going to share her insights on the current retirement landscape and discuss how to achieve a successful retirement outcome.
Throughout today's presentation, though, please feel free to enter questions for our speakers using the Ask A Question tab, which you will find below your viewing screen. We will try to address as many of these as time permits after our prepared remarks. But if you do also happen to have any trouble viewing the slides, please note you can also click the Attachments tab, which will be below your viewing screen, in order to download a PDF of the presentation and follow-along accordingly.
Lastly, please let us know your thoughts regarding today's call and future calls by clicking the Rate This tab, which again, you'll find below the viewer, and leaving your comments as well. With all that said, thank you again for being here today. I will now turn the call over to Dr. David Kelly.
All right. Thank you, Zach. And thank you all for calling-in today. And of course, I'm very pleased to be able to do this call today with Katherine Roy, and talk about the guide to retirement and all our work in this area. I wanted to start by talking a little bit about the overall outlook. But I also want to talk about it in the context of annuities. We have a cover page here, as sort of the start of the presentation, which talks about annuities being an essential slice of the retirement pie.
And I think that it's a really important point. The number one questions I get, and I'm sure all of you get from clients, is how are they going to get income in retirement? And I think that annuities are very well-positioned to provide this. In fact, I think this is probably the ideal time to look at annuities as part of the income solution. So I really think that this is a time when annuities are, for many Americans, an essential slice of the retirement pie.
But to get to the discussion about retirement income and how do you think about things in the long run, I think you have to obviously do the short-run first. So I wanted to start by talking a little bit about where we are in this pandemic, and where we are in this economy. And to do that, I'm going to use some slides from our Guide to the Markets.
So first of all, I want to start with page 20 of our Guide to the Markets, which is the third page in this presentation here. And on page 20 of the Guide to the Markets, we show on the right-hand side what's been going on with the pandemic in the United States, in terms of both cases and fatalities.
Now the bad news, as I think we're all very aware, is that far from seeing the virus disappear over the summer, the pandemic has actually gotten worse. We did see a reduction in the number of cases between about April and the end of May. And then unfortunately, as we began to reopen parts of the economy, and as people became a little less vigilant, the virus just took off again.
And now we're running at a pace of about 60,000 cases a day or so-- and sometimes more than that. So clearly, there's been a very big increase in the number of cases. And this contrasts very strongly with the experience of other developed countries in Europe or East Asia. And that's a big problem. And it's obviously much more than a big problem for the families affected. But it is affecting families in terms of health. And very sadly, a lot of families have lost a loved one because of this.
But it also affects the economy. And the economy won't be entirely right until we have dealt with the pandemic. Now there is some light at the end of the tunnel. I think there are two big sort of chinks of light here. One of them is that there is a lot of progress being made on vaccines. I have a lot of confidence that the biotech industry overall understands vaccines and different vaccine approaches better than they have ever done in the past.
And not only do we have multiple candidate vaccines being tested right now, they are actually multiple ways of approaching the whole issue of vaccination. And none of them are likely to be 100% effective. You get very lucky if you have a 100% effective vaccine. But it's likely there will be multiple vaccines which are partially effective. And a vaccine is a tool. It's a tool by which you can crush the virus.
It's very hard to eliminate the virus, certainly globally. But you can get the virus down to a level where people can go back about their daily lives, with the proper precautions. And then hopefully, over a number of years, if we have a global approach to eradicating COVID-19, perhaps we can someday get to a day when the world is COVID free.
But that's not where we are right now. I will say, though, there are a lot of candidate vaccines. The industry is working very hard and diligently on it. And indeed, governments around the world are supporting those efforts. And so we do expect that over the course of 2021 vaccines will be rolled-out, which will allow the world to essentially get back to normal.
The other thing that's important is the mortality rate has fallen. Now we, like everybody else, are investigating this and trying to figure out what's all behind this. Part of it is a lagged effect. And so unfortunately, this increase in cases up to 60,000 to 70,000 will probably push the overall number of mortalities up to close to 1,000 a day again over the next few weeks. But still that's better than the 2,000 a day that we were seeing back in April, even though we had half the caseload.
Part of the story here is a decline in the average age of people who are getting infected. And this is particularly important, because this disease skews incredibly in terms of age. It is very, very dangerous for people over the age of 80, very dangerous for people over the age of 70. For somebody who's in their 20s or in their teens, it's really not very dangerous at all.
And so as that age has come down, that has reduced the mortality. But also importantly, there does seem to be evidence that simply the medical community is figuring out how to deal with this-- how to treat this better. Because after all, it was a novel virus. We didn't know how to deal with it. And they are learning. And so we've got drugs like remdesivir. We've got dexamethasone. We have, of course, plasma therapy, which is a very old cure. But that helps.
And then just simple procedures, like putting patients on their stomach as opposed to their back, to help their lungs function better. All of these things are actually having an impact in cutting mortality rates. So there is some good news here. We're not out of the woods yet. We're a while from getting out of the woods, but there is hope.
If you flip to the next page, though, of course, what this pandemic has done is it's put us into the deepest recession, really, since World War II. Now next week, we're going to get a number for second-quarter GDP. And when we get that number for second-quarter GDP, we'll actually be able to tell how deep this recession was.
But if you look at this slide here, which is actually page 18 of our Guide to the Markets-- and it's a page 4 in this deck-- you can see that the size of this recession really is the biggest recession we've seen since World War II. It's also technically very short. Because the way you define recession is recession is when output is falling. And actually, output was falling from February through April. Since then, output has been rising again.
Some people have said, well, given how fast output has been rising, isn't this basically a V-shaped recovery. And I think it isn't. It's a sort of a V interrupted. It is a plunge, a bounce, a crawl, and then a surge once that vaccine gets broadly distributed. But it's very important to recognize that there are parts of this economy, particularly in entertainment, leisure, restaurants, travel, retail-- there are parts of the economy that just cannot operate profitably in the social-distancing environment. And that, unfortunately, continues to be the case.
So there's a large chunk of this economy, we just can't get better in this environment, until we've got the cases down. And that's going to slow this recovery significantly.
So the way we see is-- if I want to put numbers on it, if you think about the four quarters of 2020 and the four quarters of 2021, roughly speaking, I think what we're talking about is minus 5, minus 35, plus 20, plus 5, plus 5, plus 8, plus 10, plus 10. Those are real GDP growth rates-- minus 5, minus 35, plus 20, plus 5, plus 5, plus 8, plus 10, plus 10. In other words, a plunge, a bounce, a crawl, and a surge, once that vaccine is distributed.
And I think when you look at financial markets, they haven't really built all that in. So I think there is the danger here of some correction in the short-run. And that's why people have to be diversified. But of course, that's one that's one of the great advantages of financial markets today You can be diversified. You can have all the different assets, across stocks and bonds-- large, small, growth, value, international, domestic. You can have all sorts of alternative assets. You can have a very diversified portfolio.
And really when I think about the greatest tools, the greatest advantages that big financial institutions can bring to investors, one of them is diversification. And actually, the other, I think, really important one for retirement investors is a annuitization. I think there are two free lunches in finance-- diversification and annuitization. And I'll explain why I think that's so important right now.
So if you turn to the next page, page 5, you can see the ratio of total household assets to total household disposable income. And it is has really shot up. I mean, it used to be about five times-- maybe 5 and 1/2 times disposable personal income. And now it is up at 7 and 1/2 times. And it really took off in the 1980s and just kept on rising.
But at the same time, if you look at the next page, on page 6, you can see that miserable decline, from an income perspective, in real treasury yields. You're hardly getting anything positive at all. In fact, it's a negative. And then for dividend yields, right now it's slightly positive. But still it's not great, if you've got a long-term outlook for inflation of 2%.
And that's a problem with income. It's hard to get any real income in an economy. A 50/50 stock-bond portfolio basically generates no net income at all, if you're using treasury bonds as your income piece-- or very low income, even if you're using some corporate bonds or high-yield bonds. And that's really the dilemma.
I'm thinking there are a lot of you on this call who probably have been working with the same clients for 10 to 15, 20, 25, 30 years. And I think it's worth it you know it's worth asking these clients-- I'd ask them two questions. One-- we've been working together for the last 25 years. Did you ever think you'd have this much money?
And the answer is probably, no. Because honestly, financial markets have been very kind to people. And the growth in the value of assets in the last two or three decades has been enormous. It's been extraordinary.
But you ask them another question-- did you ever think that all this money would yield you so little an income, or so small an income? And the answer is also, no. And that in a nutshell is the dilemma that investors face today. They've got all these assets, but it's not generating any income. So what do you do?
Well, I think what you do is you recognize that, look, all this liquidity has pushed up asset prices, but equally all this liquidity has pushed down yields. If you're trying to get income, and you're going into retirement, the logical thing to do is to say, look, I can't get all my income just from yields.
The logical thing to do is to have a systematic withdraw from a portfolio. Take some income. But take it from dividends and take it from coupon payments, certainly, but also take it from capital gains. Ease into principle.
Not selling principal is actually a lousy principal. People need to get past that. You've got to be willing to sell principal. If you're going to, in a low-inflation environment, it's fine. But if your goal 20, 25 years ago was I want to be able to pay for my retirement-- I don't want to be a burden to my kids, or my grandkids. I want to be able to pay for my retirement-- to finance myself, to maintain that economic independence. Then is it OK to eat into principle. It's probably the only way you're going to be able to spend wisely in retirement.
But if that's what you want to do then the question is, well, how do you efficiently eat into principle? And that is where annuities come along. Because if you look at the next page here, what we look at is the probability distribution, essentially, in terms of your life expectancy at age 65.
I would look at people who are aged 65-- what's their median life expectancy? And then, what's the 95th percentile? And the 95th percentile is actually about 98 years. And the median is about 85 years. But if you're doing it yourself-- you're just saying, OK, I'm going to eat into principle, so how much principle can I use every year so that I am 95% sure I don't run out of money?
Well, you've got to have a plan that lasts you to age 98, roughly. I mean, it differs for every individual. It differs across gender and across income groups. But roughly speaking, you've got to have a plan that lasts you into your late 90s.
But for an insurance company, who've got 10,000 people or 100,000 people on their books, all they've got to do is plan for the average-- plan for the median. They've just got to distribute principle in a way that gets you to age 85. And that gives you more principle to work with. And that is precisely why annuities can deliver a stronger stream of income in retirement than somebody could safely take on their own if they're eating into principle.
And of course, in a low interest-rate environment that becomes even more important. It is precisely because interest rates are so low that more of the income that you get in retirement has got to come from redeeming this principle.
So if you look on the next chart here, we show at the annual income you could get from a half-a-million dollar investment when you're trying to draw it down in equal payments at an 8% interest rate. And you know the difference between planning for the median and planning for the average, that difference is about 15%.
So you lose 15% of income if you have to do it yourself relative to doing it through an annuity. But actually, if you look at a low-interest-rate environment-- and this, frankly, is a 4% interest-rate environment-- that's still much better than people are going to get-- then the annuity advantage is significantly higher. It's about a 30% advantage.
And I guess that's really the bottom line. This is a time when people need to, if they're in retirement, if their goal was to finance their retirement, then an annuity is an essential piece of that retirement income answer. And is it particularly valuable when asset prices are high and yields are low, because more of your retirement income has got to come from eating into principle-- from taking advantage of the principle you've accumulated. More of it's got to come from that.
And the beauty of annuitization is, because you can average over lifetimes, that allows you to get a better income-- to get a more-efficient distribution of that principle back to investors. So that's why I think this environment, uncertain as it is-- it's uncertain. That means diversification. But it's also very low interest rate. And that means for retirement investors annuitization has got huge advantages.
So those are the main points I want to make. But I now want to turn over to my colleague, Katherine Roy, to talk about some of our views that we express in the Guide to Retirement. Katherine?
Great. Thank you, David. And I really appreciate your partnership here, as well as everyone's attendance. I think this is an amazing topic, and you have done a great job summarizing, I think, the current conundrum. As I was preparing for this today, I've reflected upon-- actually, I was mortified by the fact that I have been studying or involved in retirement income methodologies and philosophies for more than 18 years. And I think what's clear is there's no one silver bullet that applies to everyone.
But I think to David's point, an annuity definitely-- I think we can all agree-- is an important tool in the toolkit, that people should consider as they're building stronger retirement income plans. And I think there some client profiles that really bring what David's saying home, in terms of the types of individuals that maybe struggle with that principle of selling principal-- who may be stretching for too much yield and putting themselves at risk that way.
And so I'm hopefully going to use some Guide to Retirement slides to tell the story of the four profiles that I think really could benefit from some serious consideration for annuities-- as well as the features of annuities that really come to the forefront, in terms of strengths for those particular profiles.
So if we turn to the next slide-- so slide 38 in our Guide to Retirement, 11 in the presentation. There have been really three common approaches to build retirement income plans, over the last 18 years that I've spent time looking at this. And it includes a total return approach, similar to what David describes. There are bucket strategies.
There's this solution, which is known as guarantee the floor. And while there's been, again, a big debate in the planning community about one being better than the other, I would argue that all three have benefits and trade-offs that people need to be thinking about.
And so the guarantee-the-floor strategy here, which is essentially, look, I want to make sure that my core spending needs, however I define that to be-- what's most appropriate for me to want to be able to cover for however long I might live. To David's point, 98 or 100. I want to make sure that's covered by safe sources of income.
And that's where protected income plays a really strong role. And that often can help free up people's emotions to be able to be better invested from a diversification perspective-- have growth opportunities for their wants bucket, where they can have that diversified portfolio-- and also potentially have a legacy, where they could be even more liquid, or take on more risk because the time horizon is so much longer.
And what I've found based on my experience is that this approach, of the three, really is ideal for the most risk-averse and nervous clients. Those individuals tend to come to the forefront during periods of market volatility like we've experienced. But also to David's point, this fear of spending principle-- this can be a really powerful way of helping them get over those emotional biases. And it's also a good way to help them handle their spending in a systematic way, that they're probably likely well-accustomed to.
So I think this is, again, for the risk-averse investor. For the investor that really has a good understanding of their needs and their wants and has a legacy goal, this can be a great structure to help them again get over those emotional biases.
So the four profiles that I think this structure works well for, David did a great job of covering one of them, which is the long-lifers combined with being poor savers. So for individuals for whom that annuitization bonus is so beneficial to them. We just published research in collaboration with EBRI, where we found that basically the bottom 25% of 401(k) plan participants, that really is describing them. They're on a trajectory to not save sufficiently enough.
And so they're at the greatest risks for that longevity risk. So that's one. So David has done a great job of covering that. I'm going to cover two through four. The next one is retirement mistimers. They're the ultraconservative or too-conservative investors.
And then the third one to profile is the good savers, bad spenders. So we'll come back to that at the end. But to move to the retirement mistimers, on the next slide-- slide 25 in the guide, 12 in the presentation-- entitled "Dollar Cost Ravaging." And I had a colleague who said this to me several months ago. You might be able to control when you retire, but you often cannot control what market you retire into.
And I think we're all familiar with sequence-of-return risk. And that is this idea that I retire at the beginning of a volatile or bear market, and I'm trying to use my portfolio to meet my spending needs. And if I'm selling at the wrong time while the market's in decline to cover my spending needs, I'm selling more shares at lower prices, which really can ravage my portfolio over time. It's really the opposite of the benefits of dollar-cost averaging.
You're really putting that in reverse and hurting yourself. And so what this chart shows you, and how we find it so powerful, is it's a real-life example of a period of time that happened-- 1966 to 1995, in the bottom chart. It was a period of time that for 40-60 portfolio, because of a bear bond environment, it really underperformed early in the period.
So if you see from '65 to about '75, '74, below average or negative returns are really concentrated in the first 10 years. And then obviously really great returns are found later on, at the end of the return cycle. And so the average over time is about 8%. Or actually, it's 9.1%.
On the top chart, which is graphed 8%, which is the purple line-- showing you, well, if you just averaged 8% every single year, and you withdrew 5.2% of your initial portfolio-- which is what most Americans think they can do-- you see that actually they have rising wealth over the course of the entire timeframe, if they were able to average that 8%.
However, if they owned a portfolio that actually averaged 9.1%-- so a full 1.1% more-- because the sequence that that return was achieved was challenged at the beginning, when wealth was greatest and they're making withdrawals, they run out of money by the time they hit 90. So again, this assumes someone's spending at a regularly regular rate. It doesn't reflect some other research that we think is really powerful that we've done, that shows that actually most Americans are surging into retirement in terms of their spending. And they can be quite volatile as they're figuring out this new life stage.
So that can even further exacerbate the outcome here. And so having principle protection as a feature is important. Having a more disciplined distribution plan that an annuity can provide can help curtail some of that surging and volatility in terms of spending. And so both of those features, we think really play well in terms of this particular profile. So retirement mistimers benefit tremendously by those particular features that annuities can offer.
Now let's move on to the ultraconservatives-- or I would just say the too-conservative type of retirement investor. So someone who wants to be very much biased towards bonds and isn't really willing or open to taking on sufficient risk to keep pace with some of the costs that we know are going to accelerate as people get older-- namely, health care.
So on slide 13 in the presentation, 22 and our Guide to Retirement, we really lay out, I think clearly, why health care and the growth in these costs require that some level of growth opportunity remain in that retirement portfolio for the 30, 35, 40 years that David laid-out, in terms of how long this retirement can last.
And that's really highlighted in the top chart, by the far-left health care bars, that show that older Americans spend more on health care as a percent of their spending than they do when they're younger. It's one of the rare categories that that's the case. And to compound the concern, it's also the fastest-inflating category now. This year, for the first year, it surpassed education in the bottom chart, at 4.8%. So it grows quickly, and you buy more of it, which means that it's really going to grow over the course of your retirement, requiring that growth opportunity.
So if we put it all together-- on slide 31 in our guide, 14 in the presentations, so the next chart-- here are our estimates for what somebody going on original Medicare at age 65 this year estimated to be $5,300 per year per person out of pocket, with that combined growth rate of 6%. So that combination of inflation plus usage puts you at a 6% hurdle, which means you're going to need sufficient return to keep pace with these types of costs.
And so therefore, that ultra or too-conservative-too-quickly individual really should be thinking about the potential for variable annuities or indexed annuities that do give them some growth potential, but with that guarantee. It can help them emotionally understand, I need to take this risk, but I'm really worried about losing principle or falling behind, particularly during periods of market volatility. So that can be great features in annuities, that can help them get that growth with that protection.
And candidly, having run a lot of planning analysis looking at these different scenarios, this is one clear area. Let's say if you have a 20% equities, 80% bonds investor. And let's say they just put 20% of those bonds into one of those variable or indexed annuities. That growth potential we know does improve their outcomes, in terms of Monte Carlo simulation. So it's a clear improvement in the outcome that that individual can achieve.
And so the last slide I just want to wrap-up on this idea of the good saver and bad spender. So slide 40 in our guide, slide 15 in the presentation, I think brings to life some of these profiles, and many of the points that David made. And so what this is showing is really the four key profiles that we see-- individuals entering retirement, running their retirement planning tools with you and seeing what their outcome is, and how that aligns to some of the solutions they should be considering.
And so obviously, the blue line of increasing wealth, that's an estate-planning client, who really needs to be thinking about gifting and other strategies, because their wealth is going to be greater when they pass away than it is today. So that's really not a retirement problem. But the bottom three are.
So the bottom gray line, the total draw down, where annuities make tremendous amounts of sense, is those long-lifers, poor savers. So that's the individual or the participant who is going to run out of money, for whom that annuity can be hugely helpful.
But what I mean by the good saver, bad spender gets to exactly what David was saying. This preserves principle line-- the green-- it used to be that was a goal for many individuals. They got to retirement. They could live off of the healthy income that that portfolio was producing. So they really never had to tap that principle. They could plan to give their full principle value to that next generation, and that often was their goal.
But we're seeing many clients and individuals today being in that preserve principal stripe not out of estate-planning intention or the desire to give to the next generation, it's because they're scared. They're scared to tap that principle. They are used to, as good savers, using the cash flow that's coming into their accounts each month to calibrate their spending.
And so they're putting their savings aside first. They're seeing their cash flows come in. They're calibrating their spending to what their cash flows are enabling them to do. And retirement often is an emotional juggernaut for them. All of a sudden that free cash flow goes away. If they're not able to generate that off their portfolio, as David outlined, they start to constrain their lifestyle to too great of a degree. And they're giving up a lot of happiness, a lot of enjoyment of this life stage, that this wealth was really intended to provide to them.
So we just think more and more people should be actually in the purple line. The purple line-- partial drawdown-- figuring out how much of your wealth you want to efficiently distribute to you in a systematic way, to help you with that free cash flow-- help you understand what you could be spending successfully. And that could be provided through that systematic withdrawal plan that David talked about. But that's often very difficult for individuals to do. And an annuity can be that much more efficient and systematic, in terms of the payout feature it can provide-- giving people that permission to actually use a portion of this wealth to enjoy their retirements.
And so maybe to bring this home, one of the reasons why there is no one common outlook on retirement income, and it's all so specific, is the rules of thumb can be quite inefficient and maybe not applicable to everybody. So slide 24 in our guide, the next slide in the presentation, 16, just shows the rule that we've been dealing with for the last 30-plus years is the 4% rule-- on the left-hand side showing, what can I withdrawal from my plan or from a portion of my portfolio, and make sure I'm not running out of money?
But you see what a slippery slope it is. So the 4% is the gray line. And it shows that that's still successful. But what if you go a little bit over, and you do actually 5%. You see how you run out of money. So this terrifies people. Because they're like, well, I don't know-- how do I actually carve-off the right amount? And how do I make sure that I'm doing the right withdrawal strategy, so I don't run out of money?
Because on the left-hand side, 5% gets you into trouble. But on the right-hand side, the 4% rule historically hasn't been efficient either. You see that there's a 1-in-5 chance, if you had implemented the 4% rule, that you would have had more than $5 million after a $1 million initial investment at the end of the time period. And that's really lifestyle risk. That's, I'm not using my capital efficiently.
And so the rules of thumb don't solve this. And this is where annuities step in, and I think provide a much more efficient outcome for the wealth that individuals can carve-off that they're OK to spend, and help that good saver, bad spender-- again, not best spender, they're out of control spending. But bad spender, they have a really hard time emotionally tapping this principle. Annuities can create this mechanism to give them that permission, and hopefully make the most of their retirement.
So with that, I will turn it back to Zach. Great. Thank you, Katherine. And thank you, Dr. Kelly. We'd now like to address questions that have been coming through online. As a reminder, if you do have any questions you'd like to submit, you can click the Ask A Question tab-- again, which you'll find below the slide viewer-- to type-out and enter your question.
For a few that have come through so far, though, I actually think the first one is for you, Dr. Kelly. You mentioned the idea this social-distancing recession looks like a plunge, a bounce back, a crawl, and then I believe you said a surge. And the question that came through was in regards to the impact of policy response, when you think about that bounce. Given what we've seen, if and when do you think we would address the debt levels, and what would be the long-term consequence of that?
Well, I think it's a very important issue. First of all, I think this continued stimulus is essential for the moment. And the reason is-- I know the Congress right now is debating with the administration-- the Senate, the House, and the administration are all debating this new bill.
But if they don't pass a bill, then a few terrible things happen. First of all, there are over 20-million people unemployed in the United States right now. And many of those people are people who are working in the hotel, the restaurant, the travel, entertainment, leisure industries. They weren't making very much money. They had pretty much a paycheck-to-paycheck existence to start with. They were working long hours for small pay.
And the problem is that our current unemployment-insurance system is set-up so that your unemployment check is about half of what you would normally make in a week. But for these people, they were barely getting by on what they're making a week. If you cut that in half, and you don't do something about it, you're going to have widespread poverty and probably social unrest in the United States in the second half of this year. So it's essential that there is something done to try to help those people who, through no fault of their own, find themselves unemployed for an extended period of time while we deal with the pandemic.
Secondly, there are a number of state and local governments. Almost all of them have to, by constitution, by law, they've got to balance their budgets. The only way they can do this when their revenue falls so sharply-- and it has fallen so sharply. The only way they can do this is by laying-off workers. After the Great Financial Crisis, we had five years of declining employment in state-and-local government. So we need to avoid that, also.
And then there are many companies who are, unfortunately, going out of business here-- small businesses running out of capital. And I think we have to do something to try and support them. So it's very important.
It's not so much to stimulate the economy, it's to support the economy. The economy is sick, and it needs continued medicine until we have a vaccine that is going to help us get out of this. But having said that, we also need to have the absolute iron discipline [LAUGHS] to reduce the deficit when this pandemic is over. And that is much more important now than it has ever been before.
So we need to make sure that as we go into 2021 and 2022, as the economy recovers, that we have elected people who are willing to take the tough choices-- to increase taxes, cut spending, and to bring that budget back into balance. Because it was already very far out of whack before we went into this pandemic. It is in a much-more-serious condition right now.
So some people are ask me, well, how do I feel about the market if there's going to be a tax increase in 2022? Well, I'd actually feel better about it than I'd feel if there was no tax increase in 2022. Because if we abdicate that responsibility right now, the danger of a big financial bust-up at some stage is quite high.
Where we are right now is we don't have to pay really for what we're borrowing, essentially, because the Federal Reserve is printing money. And for as long as inflation is low, that could work. But what they're doing is they're monetizing the debt. And that is increasingly the macroeconomic risk of a financial collapse at some stage in the future. So it's very important that when this pandemic is over we have the discipline to bring the books back into order, in a way that gives confidence to consumers, households, foreign investors that we really do intend to get our finances back in balance.
Great. Thank you, Dr. Kelly. There's also another question. This one's actually for you, Katherine. And it's in regards to some of the headlines, I think, that we've seen regarding 60-40 portfolios, and if they make sense moving forward. Are you changing your approach, or should we be changing our approach based on lower expected returns? And how does this kind of impact the overall retirement equation?
That might be better answered by David, from an investment perspective. I think we see a more-diversified 60-40 portfolio being something that needs to be pursued going forward. But David, would welcome your thoughts there.
Yes. I think we have to be careful about it. Because the 40%-- the fixed income part of it-- isn't really providing much in the way of income, and there's a lot more risk involved. So generally speaking what we're trying to do is talk about it as, Katherine, as you said, being more diversified. Look at other ways of getting income-- from dividend income from more value equities. Also, I think alternative is a good place to look. Real estate, infrastructure, those are some areas.
I think international equities, which are very much unloved, also provide good dividends. And it can be some protection here. And I think annuities, also, is really part of this answer. I mean, you need something to stabilize the portfolio. The problem is the yield-- the income that you actually get from fixed income is very low.
So I think there's a lot of logic to say, instead of having a 60-40 portfolio, take a good chunk of that 40 and replace it with an annuity. Because it's basically a fixed income, but it's a fixed income in retirement only. But it's a fixed income which will provide you some stability in the portfolio, while providing income. And unfortunately, that's the traditional role played by bonds. But if bonds are basically not doing that very well, then annuities, I think, are a good alternative.
Great. Thank you. Again, I'll leave you with this, if there's no further questions in the queue, if you will. I would just like to thank everyone for joining us on today's call. Thank you, Dr. Kelly, as well Katherine Roy, for providing us with great content in regards to the Guide to the Markets and Guide to Retirement.
For those of you that may be interested to where you can find more information regarding some of the publications both Katherine and Dr. Kelly have put out in regards to annuities and overall retirement planning, you can certainly go to JPMorgan.com/funds/annuities, as you can see in front of you. We've got some great white papers that elaborate on some of the comments and content we've shared with you today.
And then also, if you're interested in learning about where JP Morgan investments exist across the variable-annuity space, please don't hesitate to reach-out to your JP Morgan representative as depicted on the map. So if we flip forward one page, I believe, you should be able to see it. And we'll send this out as a follow-up.
But for anyone interested in how we can help out in the field, please let us know. And then finally, as a reminder, we'd like to know your thoughts about today's broadcast. So please take a moment to rate the webcast, by clicking on the Rate This tab below your viewer. And again, thank you all so much for your time and consideration. And we certainly appreciate everyone's partnership and time today. Have a great afternoon.
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