Research Highlights Fixed SPIAs

Retirement researcher Wade Pfau published a research paper titled “An Efficient Frontier for Retirement Income.”

Pfau’s paper analyzes the relative merits of equities, bonds, fixed single premium immediate annuities (SPIA), inflation-adjusted SPIAs and variable annuities with guaranteed lifetime withdrawal benefits (GLWB).

Each of these allocation options are examined in the context of achieving retirement spending goals.

Pfau creates an efficient frontier for a hypothetical 65 year old couple requiring a 4 percent withdrawal rate.

Pfau’s efficient frontier has the real value of financial assets at death (bequest) on the Y axis and the percentage of lifetime spending needs satisfied on the X axis.

A key finding is that the dominant portfolio allocation and the hypothetical couple’s “efficient frontier” consists of a combination of fixed SPIAs and equities.

This finding is similar to conclusions drawn by Mark Warshawsky.

Also interesting to note is the fact that the inflation-adjusted fixed annuities did not dominate the non inflation adjusted SPIAs. This is attributed to the manner in which insurance companies price inflation risk.

Source: Wade Pfau

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