Yes, mortality credits should give things like SPIAs ad DB pensions a leg up over bond portfolios of the individual, but how much is eaten by fees and administrative costs. But no one is really answering my question about how high the payout rate would have to be to make an SPIA tempting. The people who know they are longevity insurance will say that payout rates don't matter and it's whether or not the circumstances are right that matters and the people who think a 7.7% payout rate is actually 3.3% better than a 4% SWR without considering inflation, life expectation or a legacy will take one and think that they have a great deal, but at how much over the market rate would an SPIA skeptic start to consider them?If you tried to replicate the lifetime payout of a SPIA by purchasing a portfolio of nominal bonds, with the intention of taking money from the bond portfolio every month until you die, you would have to invest enough to cover monthly payments until a date that is well after your life expectancy. (Otherwise, the bond portfolio might run out before you die.) So, for example, a 65-year old with a life expectancy of 83 might need to buy enough bonds to cover him until age 93 or 95 or 100 (even if the odds are that he will die before then).
Buying this large a bond portfolio is much more expensive than the alternative of buying a SPIA that produces the exact same stream of monthly payments until you die, because the insurance company that sells you the annuity can fund the monthly payments by investing in a bond portfolio that assumes you will live until your life expectancy (plus a bit more as a reserve, just in case).
The insurance company can take this seemingly reckless investment approach because you are not the only 65-year old they are insuring, and they know that, in a population of 65-year annuitants, some will die before their life expectancy, and the premiums from those annuitants can be used to fund the payments to the 65-year old annuitants who live longer than their life expectancy.
This is why the payout on a SPIA is higher than the payout from a “do-it-yourself” bond portfolio - and the advantage grows larger the older you are when you buy the SPIA (which is why people sometimes advise waiting to buy a SPIA, instead of buying one immediately at retirement).
By using a SPIA, you can buy a stream of retirement income at lower cost than if you bought the same stream of retirement income in the form of a bond portfolio. This substitution has the anncillary effect of freeing up assets that you can invest — if you want to— in a risky portfolio of equities. In other words, by substituting a SPIA for nominal bonds in a retirement income portfolio, you can invest more in equities, which may produce a higher return than the bonds would have, and you may end up with a larger portfolio overall.
Statistics: Posted by nun — Sat Oct 18, 2025 7:39 pm — Replies 20 — Views 1087