Tips For Using Annuities In Retirement

Drawing on Jasmin Sethi’s comprehensive paper “Should We Have More Annuities?”, an article in Morningstar discusses how annuities might fit into a retiree’s portfolio. Annuities face both legal and practical challenges, and Sethi promotes the most basic varieties: single premium immediate annuities (SPIAs) or deferred versions of SPIAs, where the investor buys the annuity today and the benefits arrive later.

In the simplest SPIA offering, it will immediately yield a fixed monthly benefit that’s guaranteed for the buyer’s lifetime, though it won’t adjust for inflation. For a 65-year-old retiree who holds $100,000 in a balanced fund, an SPIA would afford them a steady stream of ongoing payments, and in comparison to a 30-year bond, an SPIA would yield far more income than the bond.

There is a big difference between a bond and an annuity: a bond is an asset, and an annuity is a promise. After a retiree dies, the bond continues to exist while an annuity would vanish. However, the article contends, a retiree doesn’t have to put everything into the annuity. By putting only 80% of their assets into an annuity and 20% into equities, they will receive more annual income in addition to increasing their estate.

But SPIAs aren’t always better than bonds, and the article advises specific analysis and not relying solely on rules of thumb.