Total Return is an alternative. Money does not know whether is comes from dividends, interest or gains. Since the mid-1990’s peer-reviewed research has been done by academics and practitioners (I am one of those practitioners) about distributing income from portfolios without giving your money to an insurance company in the form of an immediate annuity.
However, since everyone including insurance companies invest in the same markets worldwide, everyone’s returns should be very close to the same if using the same indexes and benchmarks. Total Return retirement income approaches should be based on an indexed approach (systemic risk). Thus, there is a way to measure and monitor the risk of outliving your resources and retain those resources for your use, or for your heirs, without permanently or temporarily giving those resources over to an insurance company.
The below graphs show that currently, managing assets from a Total Return strategy, combined with a method that measures sustainable retirement income based on both age and longevity is better in the long run as compared to buying an immediate annuity. The top graph shows that Retirement Income may increase with age as compared to an annuity today given the same portfolio value at various ages.
The bottom graph illustrates that current annuity payouts would be similar to market conditions that are poorer or below median markets of the past, for the remainder of the retiree’s life. The total benefit expected is the total income paid at any given age based on the number of expected years of longevity, plus the remaining portfolio value at the end of the expected longevity period.
The fundamental comparison discussed here is between an immediate annuity, which generally involves giving retirement income money to an insurance company in exchange for a permanent fixed income (presently a low payout from today’s low-interest rates), or designing your money so income may come from multiple sources that vary over time to keep ownership of the money in exchange for a variable income that may be regulated between “guard rails” depending on good or poor markets (see the bottom graph above).
An immediate annuity is a product solution while the total return approach is a process solution, regardless of the investments which may be in the same markets.
Note: Of course investing in stocks and bonds involves risk and does not prevent loss of capital and past returns do not predict the future. The above graphs are not based on any specific investment. Please see the disclosure link below.
Annuity monthly benefit based on starting at specified age with same portfolio value as that of median simulation portfolio value. Total expected benefit values based on total of monthly benefits paid over expected longevity time frame, plus simulation ending portfolio value corresponding to type of market. Fees and expenses, which vary depending on provider, are not included in the calculations. 40% Stock indexed/60% Bond indexed; simulations run at 10% Percent of Failure (POF) rates.