In his September 24, 2013 article, "Why Retirees Should Choose DIAs over SPIAs", Dr. Wade Pfau reaches the conclusion that "Deferred-income annuities
(DIA's) work even better than SPIA's, by providing more liquidity and better
longevity protection at a lower cost." Previously, combinations of single
premium income annuities (SPIAs) and equity investments had been Wade's
Efficient Frontier champions.
Wade mentions two risks using DIAs: 1) Over or underestimating future
inflation and the associated impact on a fixed annuity amount payable many
years in the future and 2) running out of accumulated savings prior to
commencement of the deferred annuity.
If you decide to purchase a deferred annuity with some of your accumulated
savings and self-manage the remainder, you can use the "Excluding Social Security V 2.0" spreadsheet on this website to help you model future
experience and coordinate the withdrawal of your self-managed assets with
the fixed amounts payable from the annuity to try to achieve constant real
dollar total withdrawal/annuity payments. The Runout tabs show
total combined withdrawal/payments each year under the input assumptions. The
risk of buying too little or too much deferred annuity can also be mitigated to
some degree by spreading the purchases over a number of years.
