Lifetime Expected Income Breakeven Comparison between SPIAs and Managed Portfolios

Larry R. Frank Sr.

Academy of Financial Services; Better Financial Education; Certified Financial Planner Board (CFP)

John B. Mitchell

Central Michigan University - Department of Finance and Law

Wade D. Pfau

The American College; McLean Asset Management

August 29, 2013

This paper provides insight and guidance for the retiree decision making between whether to annuitize or manage their retirement savings. Tables and graphs demonstrate the breakeven age between annuitizing with a single premium immediate annuity (SPIA) versus managing a portfolio and the likelihood of outliving the breakeven cash flow sums for various annuitization ages (65 to 85), longevity percentiles of Period Life Tables, and portfolio allocations.

What are breakeven asset allocations below which a SPIA provides a higher lifetime expected total cash flow? Managed portfolios retain a balance at death while SPIAs have none. How does the cash flow breakeven comparison change when that balance is, or is not, considered? Does age matter in the decision to switch from a managed portfolio to a SPIA? Is there a different conclusion if different tables are used (Social Security Table "General Population" vs Annuity 2000 Table ("Healthy Population"))? How do good vs median vs poor markets affect the breakeven comparison? How do fees affected the comparison? Can the Annual Payout Rate (APR) of a SPIA be useful in the decision making process?

A more descriptive paper, without data Appendices and different figures, and fewer pages has been added to SSRN in abstract http://ssrn.com/abstract=2352252. This abstract http://ssrn.com/abstract=2317857 contains the data, figures and appendices that support the work described in more and better detail in http://ssrn.com/abstract=2352252, which also has a description for a practical application that is easier to do compared to the methodology used to produce that data in these two abstracts.

Note: The cash flow in this paper is based on zero asset management fees, ½% fees or 1% fees. However, note that the fees are taken from the cash flow, not the portfolio balance, in this paper. This tilts the analysis in favor of SPIAs. Example: a 1% fee on a $500,000 portfolio would be $5000 for the year. If the cash flow for that year was calculated to be $25,000 (5% of portfolio value), then the net cash flow to the retiree would be $20,000 ($25k - $5k). However, if the portfolio itself pays the management fees, which is more common, then the $5,000 fee in this example would come from the $500,000, thus the cash flow calculation would be 5% on the $495,000 portfolio => $24,750 net to the retiree. Cash flow in this paper is based on the prior form, and thus biases the results towards SPIAs earlier than would normally be the case.

Number of Pages in PDF File: 65

Keywords: SPIA, Immediate annuity, managed diversified portfolio, cash flow comparisons, breakeven comparison

JEL Classification: D14, D81, D90, G11, G17

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Date posted: August 30, 2013 ; Last revised: April 25, 2015

Suggested Citation

Frank, Larry R. and Mitchell, John B. and Pfau, Wade D., Lifetime Expected Income Breakeven Comparison between SPIAs and Managed Portfolios (August 29, 2013). Available at SSRN: https://ssrn.com/abstract=2317857 or http://dx.doi.org/10.2139/ssrn.2317857

Contact Information

Larry R. Frank Sr. (Contact Author)
Academy of Financial Services
La Crosse, WI 54601
United States
HOME PAGE: http://academyfinancial.org
Better Financial Education ( email )
300 Harding Blvd Suite 103D
Roseville, CA 95765
United States
916-303-7777 (Phone)
HOME PAGE: http://www.BetterFinancialEducation.com
Certified Financial Planner Board (CFP) ( email )
1700 Broadway
Suite 2100
Denver, CO 80290-2101
United States
John B. Mitchell
Central Michigan University - Department of Finance and Law ( email )
328 Sloan Hall
Mount Pleasant, MI 48859
989-774-3651 (Phone)
Wade D. Pfau
The American College ( email )
Bryn Mawr, PA 19010
United States
HOME PAGE: http://www.retirementresearcher.com
McLean Asset Management ( email )
8200 Greensboro Dr
# 1150
McLean, VA
United States
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