Managing a Retirement Portfolio: Do Annuities Provide More Safety?

Spitzer, J.J. (2009). Managing a retirement portfolio: Do annuities provide more safety? Journal of Financial Counseling and Planning Education, 20(1), 58-69.

Brief Description:  One of the biggest concerns of retirees is the risk of outliving their assets. This study used a technique called “bootstrap simulations” to estimate the probability of someone outliving a retirement portfolio as increasing proportions of a tax-deferred account are annuitized. It also examined the sizes of the portfolio balance as the annuity amount increased. Required minimum distributions were accounted for in the analysis and the overall objective was for the retiree to survive a 30-year withdrawal process without running out of money. Results indicated that annuities significantly extend the length of time that a portfolio will last. However, the trade-off is a substantial decrease in the expected remaining estate size (balance). This finding was described as a “trade-off of security versus a legacy.”

Implications:  Retirees may want to consider annuitizing a portion of their savings because purchasing an annuity reduces shortfall risk. Annuitizing need not be done all at once, however. A retiree might annuitize half of their tax-deferred account (TDA) upon retirement and, when and if the TDA significantly increases in value due to a bull market, annuitize another percentage later. Annuitization does reduce remaining estate size, however (150% of the starting balance after 30 years with no annuitization versus 8% to 19% with 100% annuitization). Individuals must make their own decision about the amount to annuitize based on a number of personal factors (e.g., financial needs of heirs, age, health status, etc.). A trade-off exists between a relatively safe retirement and leaving an estate for others.