PSA: Investing for Retirement: SPIAs, TIPS, Stocks

[Midpack]

While I don't agree entirely (mostly in terms of timing more than principles), it's a timely article with some thought provoking ideas - and I am all for that!

If the quote is of interest to you, the article might be as well. [Disclosure: I found this link from Wade Pfau's blog].

Relying only on stocks and bonds to fund a decumulation strategy may no longer be feasible, given today’s low interest rate environment and the prospect of muted returns from the equities market. Investors should instead consider using single-premium immediate annuities (SPIAs) to fund at least a portion of retirement needs.

Investing for Retirement: SPIAs, TIPS, Stocks and the 4% Rule or the whole 4-page article in PDF format if you prefer http://advisorperspectives.com/newsletters12/pdfs/Investing_for_Retirement.pdf

And some interesting opinions on the article from Wade Pfau.

In my view, he has several important findings about the allocation between stocks, TIPS, and SPIAs:

-While partial annuitization has little impact on failure rates, it does help to dramatically reduce the magnitude of failure. Expected bequests are also reduced. The proper choice depends on how a retiree weighs the tradeoff between their ability to leave a bequest and their fear of running out of money.

-A TIPS ladder is quite exposed to longevity risk.

-SPIAs act as "turbo-charged" bonds. This suggests that there is not much room for bonds in a retirement portfolio. Instead of stocks and bonds, you may wish to instead be thinking more in terms of stocks and SPIAs.

-This final point is something I am still thinking through and don't have any clear opinion of my own yet. Conventional wisdom is that it is a bad time to annuitize when interest rates are low. Rather, wait for rates to rise. But I believe that Joe is essentially arguing that the overall case for partial annuitization (relative to the alternatives) becomes stronger precisely when interest rates are low.

 

[MichaelB]

I'm skeptical of Tomlinson's analysis. He tests a 4% withdrawal with an annuity instead of bonds but for the annuity uses a 4.31% inflation adjusted SPIA. That annuity return does not reflect reality for the majority of us.

 

[Midpack]

I'm skeptical of Tomlinson's analysis. He tests a 4% withdrawal with an annuity instead of bonds but for the annuity uses a 4.31% inflation adjusted SPIA. That annuity return does not reflect reality for the majority of us.

I agree it sounds high, I thought the prevailing rate was somewhere in the 3.0-3.5% range, but inflation adjusted SPIA quotes seem much harder to come by than fixed. I just took his word for it as he repeatedly names his source (Income Solutions) and date May 31 (presumably 2012).

And this works out to about 4.3% for female, age 65, inflation adjusted http://www.principal.com/retirement/incomeannuity/elm/income.htm no?

And I'm still looking forward to Wade Pfau's article...