The True Impact of Immediate Annuities on Retirement Sustainability: A Total Wealth Perspective

18 Pages Posted: 23 Jul 2013

See all articles by Michael Kitces

Michael Kitces

The Kitces Report & Nerd's Eye View; Pinnacle Advisory Group

Wade D. Pfau

The American College for Financial Services; Retirement Researcher

Date Written: July 15, 2013


Past research on systematic withdrawals and annuitization tends to find that partial annuitization reduces the probability of financial asset depletion and may even provide an opportunity to build a larger portfolio legacy value for sufficiently long retirement periods. We agree with these findings, but determine that partial annuitization itself is only the reason for these outcomes in a subset of cases. When retiree wealth is investigated from a total balance sheet perspective, by including the present value of remaining single-premium immediate annuity (SPIA) payments as a way to show the implied stock/bond asset allocation glidepath, a significant portion of the benefits provided by a stocks/SPIA strategy can be explained by the implied rising equity glidepath underlying the approach. Accordingly, we examine the relative success of static portfolios, stock/SPIA portfolios, and dynamic stock/bond portfolios that match the glidepath of a stock/SPIA strategy, in order to separate the impact of the glidepath and the impact of mortality credits into their component parts. The conclusion shows that prior studies which indicated a benefit of partially annuitizing a retiree’s portfolio were often actually showing the benefits of a rising equity glidepath using a bucketed liquidation strategy that spends down fixed assets first and allows the household equity allocation to rise. Although this research finds that SPIAs can enhance retirement success, retirees must live well past life expectancy before the unique mortality credit contribution from SPIAs provides material benefits, as the remainder of the SPIA “benefit” can be replicated simply by using bonds and stocks with a rising equity glidepath. In fact, for those who do not live to life expectancy, the impact of SPIAs is positive only because the value of the rising equity glidepath (which can be replicated without the SPIA) outweighs the negative contribution from mortality credits. Because the primary value of SPIAs accrues for those who live beyond life expectancy, the results also show that inflation-adjusted SPIAs are more effective than fixed SPIAs, due to the larger payments in later years. Given this current research, the primary scenarios where SPIAs should be used are specifically those where the intent is to hedge significant longevity risk beyond life expectancy; in the remaining scenarios for most retirees, though, the more effective way to improve retirement outcomes is simply to implement the rising equity glidepath that bucketed SPIA strategies indirectly create.

Keywords: retirement income, annuities, systematic withdrawals, SPIAs

JEL Classification: C15, D14, G11, G17

Suggested Citation

Kitces, Michael and Pfau, Wade D., The True Impact of Immediate Annuities on Retirement Sustainability: A Total Wealth Perspective (July 15, 2013). Available at SSRN: or

Michael Kitces

The Kitces Report & Nerd's Eye View ( email )

P.O. Box 2231
Reston, VA 20195
United States
703-375-9478 (Phone)


Pinnacle Advisory Group ( email )

6345 Woodside Court, Suite 100
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Wade D. Pfau (Contact Author)

The American College for Financial Services ( email )

630 Allendale Rd
King of Prussia, PA 19406
United States


Retirement Researcher ( email )

1900 Gallows Rd, Suite 350
Vienna, VA 22182
United States


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