Comparing Immediate Annuities with Managed Portfolios

Doc1Dr Wade Pfau made a video as part of the American College’s Wealth Channel series on our recent research working paper titled “Lifetime Expected Income Breakeven Comparison between SPIAs and Managed Portfolios” posted for download on SSRN.

Direct to the blog and video link (3:40). Note: if you click photo … it will also take you to the blog where you may click on the real video (photo is a screen shot).

Some important points he makes in his brief summary of the research’s findings:

  • The method used for calculating the managed portfolio is NOT the traditional 4% method.
    • The method does use Monte Carlo simulations. However, the portfolio simulations are recalculated and connected to the prior year AND the distribution period is also dynamically updated using longevity tables for each of the recalculated simulations.
  • Single Premium Immediate Annuities (SPIAs) are designed for longevity hedging and thus are shown to become appropriate for consideration at older ages (and Wade didn’t mention – at higher longevity percentiles where the probability of outliving your peers is higher; in other words, for normal expected longevity time frames, managing the assets in general may provided greater expected lifetime income).
    • another factor to consider is whether you are comfortable with equity (stock) exposure at levels at or above the level that may be needed for lifetime expected income to exceed that of the breakeven point for the SPIA option.

My blog on Robert Powell’s WSJ article on our research working paper.

Body of research that describes the methodology used in this paper is consolidated on my website.

About Larry Frank, Sr.

Larry R Frank Sr., MBA, CFP®, is an experienced financial advisor and a published author on Retirement Planning Research. Have a financial question? Click Here to Ask Larry

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