Lifetime Expected Income Breakeven Comparison Between SPIAs and Managed Portfolios

Abstract

• How do the total expected lifetime cash flows compare between Single Premium Immediate Annuities (SPIAs) and managing the portfolio in the markets?
• Use of Period Life Tables provides a better definition of the distribution period, a sense for probability of outliving certain ages, and recognition that the distribution period's length is a rolling time period rather than to a set, fixed age.
• Assets should be retained and managed in the markets, before the purchase of a SPIA should be considered, until older ages than currently thought.
• Key factors in order of impact on decision: Age (SPIA appropriate for older retirees), Longevity (higher likelihood of outliving peers), Allocation (breakeven depends on age & longevity expectations), Adviser Fees (least impact). All these factors should be considered in unison.
• SPIAs should not be considered for approximately two-thirds of the general population, and only at older ages for the rest.
• Research in the first part of this paper uses the "general population" Social Security tables. How does using a "healthier population" table like the 2000 Annuity Table affect the breakeven choice?
• Tables that have a shorter expected longevity period will favor managed portfolios while tables that have a longer expected longevity period will favor SPIA solutions.
• Longevity tables are different statistical subsets of the same overall population.
• The Annual Payout Rate (APR) that insurance companies calculate is a useful metric to simplify calculation of the breakeven point between retaining management of the assets and a SPIA.
• As interest rates increase, the APR may also increase. A practical application is described so that this comparative process may be simplified and a comparison may be made in the future as insurance company Annual Payout Rates rise or fall.
• As the retiree ages, conditions may suggest switching to a SPIA (e.g., continued good health/longer expected longevity than cohorts); however, the APR comparison may be helpful for this determination.