Annuity Skeptics Show When Immediate Annuities Could Shine

De Jong and Robinson have presented their paper as a response to papers by researchers, such as David Blanchett and Michael Finke, who have suggested that retirees should be making more use of SPIAs to maximize retirement spending capacity and retirement nest egg security.

Longevity Protection

De Jong and Robinson present an exhibit illustrating the performance of annuity mortality credits.

They say the exhibit shows mortality credits help only retirees who live well into their 90s.

“The internal rates of return from annuitization for all four of our real-world SPIAs do not turn positive until our 65-year-old purchasers approach age 90 or later (25-plus years),” the analysts write.

“Although retirement researchers frequently cite mortality credits as a reason for investors to consider SPIAs as a substitute for individual bond portfolios, our results suggest that the actuarial value of mortality credits in retail immediate annuities — at least for retirees in their 60s — may be significantly offset by the issuing insurance companies’ administrative and distribution costs and profit motive,” the analysts add.

Market Risk Management

The heart of the new De Jong-Robinson paper is a collection of exhibits showing how a SPIA contract might perform, for a 65-year-old single investor or couple with $1 million in assets, over 30 years, when compared with various portfolios of stock, bonds and cash, in a variety of market scenarios.

The authors also include an exhibit showing what might happen if the retirement savers replaced the cash and bonds in their portfolios with SPIAs.

The authors assume that initial withdrawals and fees could amount to 3%, 4% or 5% of the asset total.

The authors used a figure equal to cash distributions plus the remaining balance as their performance measure.

In most of the investment-performance-based exhibits, in a large majority of the scenarios, retirees who put all of their assets stock or stock funds generated the best results.

In typical market scenarios, holders with all of their assets in stocks and stock funds ended up with a total of $4 million to $7 million in cash distributions and balances.

But, in the exhibits based on investment performance, in the worst 1% of market scenarios, savers who had SPIAs beat the retirees without SPIAs. They ended up with totals for cash distributions and balances ranging from $1 million to $2 million.

In most of the exhibits, SPIA holders beat the other retirees in 10% of the market scenarios.

In some exhibits, SPIA holders beat investors without SPIAs, and just 60% of assets held in stocks or stock funds, in 20% of the market scenarios.

(Image: Sergey Nivens/Adobe Stock)