An investment portfolio that holds a single-premium annuity (SPIA) is likely to perform better than a conventional portfolio at providing lifetime retirement income while preserving assets for heirs, according to Financial Research Corp. (FRC) analysts.
Analysts at FRC, Boston, have published this finding in a summary of results from 1,000 trial simulations.
The analysts looked at whether a hypothetical portfolio totaling $500,000 could achieve a 75% success rate at meeting two objectives: Providing a retirement income to age 92; and providing assets for heirs at the death of the retiree.
The analysts compared the performance of portfolios incorporating only conventional assets, including stocks, bonds and international investments, with portfolios also holding a $200,000 SPIA. The analysts assumed a SPIA payout rate of 5.1%, a 2.5% inflation rate and an annuity withdrawal rates ranging from 4% to 6%.
Among the study’s findings:
- Assuming a 4.5% withdrawal annual rate, a conservative portfolio with a SPIA included achieved a 75% success rate in providing retirement income to age 92. A conservative portfolio without the SPIA had just over a 60% success rate.
- Using a moderate/conventional portfolio, the success rate for the SPIA portfolios exceeded 90%. The success rate for portfolios without a SPIA was about 70%.
- In 50% of the cases, a retiree who had a moderate SPIA portfolio would have died with $300,000 to leave to heirs; a similar retiree with no SPIA would have had just $150,000.
- Warren S. Hersch