An Immediate Annuity Is Probably Never The Right Answer

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An Immediate Annuity Is Probably Never The Right Answer

In the Journal of Financial Planning, Harold Evensky had a nice column entitled “These Innovative Research Papers Deserve Your Attention” in which he writes:

“The True Impact of Single-Premium Immediate Annuities on Retirement Sustainability: A Total Wealth Perspective” by Michael Kitces and Wade Pfau (Retirement Management Journal, Spring 2014).

How could I miss a column without including Michael and Wade? Obviously I couldn’t. Challenging the conclusions of most prior research, the authors conclude “… the results suggest that most prior studies which indicated a benefit of partially annuitizing a retiree’s portfolio were actually showing the benefits of a bucketed liquidation strategy that spends down fixed assets first and allows the household equity allocation to rise… .” And, if that conclusion isn’t challenging enough, the ultimate conclusion is “… for most retirees, though, the more effective way to improve outcomes is simply to implement a rising equity glide path.” This paper is definitely sending me back to revisit my belief that SPIAs are the investment of the next decade.

Let me translate:

Using the appropriate amount of bonds provides a superior strategy to any considered use of purchasing an immediate annuity.

Or more simply:

An immediate annuity is probably never the right answer.

There are a number of parties with a vested interest in selling immediate annuities who write seemingly scholarly articles on how having some allocation to immediate annuities is better than such-and-such. Kitces and Pfau took that challenge head on and found that there is nearly always a more effective answer using the appropriate amount of fixed income assets which can be spent down first.

There are nearly always better alternatives to an annuity. At least I have never found a case where I thought an immediate annuity was the best strategy.

Photo used here under Flickr Creative Commons.



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David John Marotta is the Founder and President of Marotta Wealth Management. He played for the State Department chess team at age 11, graduated from Stanford, taught Computer and Information Science, and still loves math and strategy games. In addition to his financial writing, David is a co-author of The Haunting of Bob Cratchit.