Michael Finke’s Post

This is interesting I find myself drawn to the idea of annuities, but usually can't find the products that fit the need. What would the cost be for an annuity that pays $35,000? When I look for the amount of income $500k can buy in a SPIA, I find that it's far less than $35k.

Very interesting. This also highlights the importance to help individuals with planning & income projection tools that converts total balance information to projected retirement income. That is hard for an individual to do on their own. As consumers, individuals align spending with periodic income projections. It is hard for someone to align periodic spending with a total wealth balance. It is promising the 401k statements show projected retirement income. What is also needed is retirement income planning tools that can project integrated retirement income including retirement plans, Social Security and other assets.

So, would it be an incredible stretch to assume that those with annuities spend more freely than those without Michael Finke? sjm

I only wish the industry as a whole would really embrace these "annuitization" studies. As a collective, the industry, is pretty happy with "withdrawal rates" from savings/investment contracts. IMO, it's really a shame because; so much could be done in the annuitization space to bring us from the 20th century into the 21st century. The industry only spends a tiny CapEx re annuitization vs what they spend on other contracts and support. If it wasn't for these academic studies, they would be no support at all.

"Payout rates estimated using this approach are relatively generous compared to historical estimates of safe initial withdrawal rates from a portfolio. For example, a male/ female couple both age 65 retiring in 2005 would have a payout rate of 5.16% using this model. The payout is higher than practices such as the 4% rule given the risk pooling structure of the annuity.  " I may be misunderstanding, but is this comparing apples with apples? The 4% (not a) rule assumes withdrawals increase with inflation each year, not a steady 2%. If you fixed increases by 2% pa, I'd suggest the starting % amount would be higher(certainly for the UK, where we have experienced bouts of 25% inflation).

Looking forward to reading this. Fear of spending is often directly attributable to the fact that most distribution strategies subject the retiree to sequence of returns risk. Everyone remembers 2008-09. Take away that risk and retirees would feel much more comfortable spending from their savings.

Great stuff and definitely aligns with what I see with my retired military clients who freely and easily spend their full pension amount every month while sleeping well at night doing so! Far less so when it comes to spending their portfolio withdrawals. The mental accounting difference between the two is strong. Retirees without pensions are well served when incorporating their RISA, LLC profile and utilizing annuity income sources + Social Security to help cover their "minimum dignity floor expenses" (h/t Roger Whitney) and get that better peace of mind. Then utilizing risk-based guardrails (thanks Income Lab!) to cover the more discretionary parts of retirement spending.

🎉 on releasing this piece! The License to Spend work is always a big hit because it really supports the behavioral value of lifetime income. I know this new paper will become a key talking point across the industry.

Not only will retirees feel freer to spend their assets, they'll be less stressed! Improving health, longevity and quality of retirement.