"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."
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
"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."
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