Should Consumers Convert Their 401(k)s to a Lifetime Income Stream at Retirement? The Short Answer is "NO"

John Robinson |

By John H. Robinson, May 15, 2022

In recent years, some researchers and thought leaders in the financial planning community have advanced the idea that consumers should strongly consider converting some or all their retirement savings to a lifetime income stream through the purchase of single premium immediate annuity (SPIA) contracts issued by insurance companies in the retail market space. My latest research paper,  Is the Annuity Puzzle Really So Puzzling? (An Analysis of the Consumer Lifetime Annuitization Decision in a Low Interest Rate World), explores the wisdom of this advice.  The paper, which has just been posted to Social Science Research Network (SSRN) pending submission to a peer-reviewed journal, is the latest collaboration with my Nest egg Guru co-founder, Jack DeJong, Jr Ph.D., MBA, CFA. Our findings run decidedly counter to the prevailing industry guidance.  Key takeaways from our study are as follows:


  • The current low-interest rates in bonds and cash may cause sequence of returns risk in bond returns that may necessitate inflation-adjusted withdrawal rates of less than 3% in static distribution models to achieve 30 years of retirement income sustainability.


  • Retirees in the current low-interest rate environment are better served with initial equity allocations approaching 80% instead of the standard 60%:40% stock-to-bond allocation and by applying a bonds-first distribution strategy instead of maintaining a constant allocation  (with annual rebalancing) or by shifting from stocks to bonds over time.


  • Researchers tout mortality credits as an inherent advantage of SPIAs over individual portfolio management.  We find that the value of mortality credits for consumers who purchase SPIAs in the retail marketplace at normal retirement age seems to be largely offset by the distribution expenses and profit motive of the issuing insurance company.


  • Substituting SPIAs just for the bond portion of a portfolio in a low-interest rate environment does not appear to enhance portfolio sustainability.


  • While SPIAs may be suitable for limited sets of consumer circumstances, such as the absence of a bequest motive or extreme risk aversion, unless "black swan" negative investment conditions occur, annuitization via SPIAs for consumers at or near normal retirement age (65) is likely to result in a significant tradeoff in total lifetime income and assets if the future is even modestly less apocalyptic and/or if the annuitant(s) do not live longer than 30 years in retirement.


  • Researchers and financial advisors may do well to move away from the static distribution models used in most financial planning software and focus instead on ways to make dynamic distribution strategies practically implementable. Similarly, consideration should be given to the fact that consumers generally value the earlier years of retirement more than the later years and that the existence of “buffer assets” such as home equity, long term care insurance, and social welfare programs, may ameliorate some of the need for portfolio sustainability in late retirement.


Related Reading:

The Annuity Puzzle (NY Times)

Why Annuities Are So Helpful in Today’s Market Environment (Plan Advisor)

It’s Time to Retire Static Planning (Income Lab Whitepaper)


John H. Robinson is the owner/founder of Financial Planning HawaiiFee-Only Planning Hawaii, and Paraplanning Hawaii.  He is also a co-founder of fintech software-maker Nest Egg Guru.



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