annuities / pension / retirement income / retirement paycheck

Single Premium Immediate Annuity vs. "Safe Withdrawal" Strategy

“Economist and mathematician Michael Edesess compares a “safe withdrawal” strategy from a 60/40 stock-and-bond retirement portfolio with a single premium immediate annuity of the same value. He found the SPIA offers retirees a bigger monthly payout and decreases their chances of running out of money.”

Author/researcher Michael Edesess explains:
A safe withdrawal rate is the percentage of your assets you can withdraw each year without danger of running out of money, no matter how long you live. The seminal work on the subject was written by financial planner William P. Bengen and published in the Journal of Financial Planning in October 1994.”
Bengen asked the question, with a portfolio of 60% stocks and 40% bonds, “What percentage of your starting assets can you withdraw yearly for the rest of your life without fear that you will run out?”
“His answer, based on simulations using past history, was that you can withdraw 4% a year (adjusted for inflation).”

“But in recent years, stock and bond market conditions have changed. Interest rates are historically low. This has caused some researchers to argue that 4% is not a safe withdrawal rate anymore.
In 2013, three researchers found, using their revised stock and bond market parameters, that as low as a 3% withdrawal rate would still mean a 10% chance of running out of money — too big a chance for comfort.”

Edesess compared the “safe withdrawal rate” strategy to buying a Single Premium Immediate Annuity (SPIA):  A SPIA “is a financial instrument that guarantees you a consistent monthly income as long as you live.”  Don’t confuse a SPIA with the “more complicated, expensive, and much less useful annuities with other names, such as variable annuities or fixed-income annuities.”

According to Edesess, “My own calculations show that for an investor to be 95% certain of not running out of money with a safe withdrawal strategy from a 60%/40% stock-bond portfolio, the strategy would be to withdraw 3.5% of the initial investment in real (inflation-adjusted) dollars each year.”
“If the portfolio started with $500,000, for example, the average annual lifetime income would be $23,000. With the SPIA, the average annual lifetime income would be $33,500, and the certainty of achieving it is greater than 95%.”
“Thus, both the certainty of not running out of money, and the lifetime income, are much greater with the SPIA than with the ‘safe withdrawal’ strategy.”

By purchasing a SPIA you are creating your own pension

Read the full article at: https://www.marketwatch.com/story/this-one-investment-move-can-give-you-lifetime-yearly-income-in-retirement-2019-04-29
Source: Financial Planning for Women