Wednesday, October 2, 2013

Use Our Spreadsheet to Estimate How Much Deferred Annuity to Purchase

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.