Can You Retire Early?

Here's a neat little chart from businessinsider "How close am I to early retirement"? Just find your income level and then the difference between your spending and saving. The answer as shown in the chart is how long it takes to build a next egg you can retire on by taking the magical 4%/year. Do this and you won't run out of money.

Simple? Yes, but useful as a general guide.

The problem is tricky as I've written several times on this blog. You've got inflation, market performance, how long you will live, medical costs and all sorts of unknowns. Some people take more comfort in getting complex analyses which produce Monte Carlo scenarios etc. To me simple is better. But it is very important to revisit the issue every couple of years at a minimum to see where you stand.

Some people target a number. For example they might have $1 million as the value of their nest egg at which they can retire. A problem here is that the number will be hit when the market is at a high point. I had a distraught individual who came to me after he had retired in 2000 and then went through the dot.com bust and had to go back to work. He then retired after the market hit a  record high in 2007 and then experienced the 2008 down 37% market. Needless to say he was at wit's end!

One way to approach this is to consider 4% of 80% of your portfolio. Can you have a nice retirement off of this? It may not be ideal but would it be ok? For example, if your nest egg is $1 million then 4% of 80% (.04 * $800,000) would be $32,000. If this would be ok (combined, of course, with Social Security etc.) then you could withstand a downturn in the market.

But back at the chart, what I really like is the out front emphasis on income and sending. The gap is what is key and it is important to not get lost in the weeds with all the other moving parts!

A Proposal - Step 4

Ok...so to rehash what we have so far to get most people on track for a nice retirement: for your first job, assuming the company has a decent 401(k) just elect to put at least 10% away out of each paycheck and pick the Fund corresponding to the retirement date or life cycle or target date Fund. Forget about it, go to work and when it reaches $60,000 or so say switch to a well defined asset allocation using low cost index Funds.

How to do this can be presented by Human Resources on the first day of employment by using a short online video. Why can't Fund providers do this? Well, they can but they won't  because they get far greater fees by getting Plan participants to use higher cost actively traded Funds that they switch around frequently.

The beauty of going target date Fund and then low cost Funds is that it gets over some formidable hurdles. First, many would be participants back off because there are so many choices. Economic theory has found that too many choices is actually not a good thing in many instances. Secondly, many would be participants just don't understand the process and that they are responsible for building their own nest egg. They think it takes time and expertise to do this. In fact, it runs itself once it is set up.

Now we come to the third and final phase. This is when you have reached the point where you need   to generate an income off your nest egg. Note that at this point your goal has changed significantly from growing your nest egg to generating an income off of your nest egg.

There are some choices here. Today for example you can get approximately 5.5% off your nest egg by buying a single premium immediate pay annuity. This is an insurance product that pays a monthly income (or at whatever interval you pretty much request) and has the clear advantages of ensuring you never run out of money and not being subject to a possible sharp drop in the market. The big disadvantage is that you lose control of the money both for emergency needs and for leaving assets to heirs.

Another choice is to invest in Treasury Notes. At the present time the 10 year Treasury Note yields 1.6%, about in line with the rate of inflation. A big disadvantage in addition to the low yield is that the interest payment stays constant over the life of the Note. This means that the interest payment you receive over the next 10 years would stay the same. Assuming inflation rises this means you would be losing ground.

The third alternative is to create, in effect, your own annuity by using dividend stocks. For the retiree willing to spend some time at it there are numerous solid stocks that offer yields of 3% and higher. Furthermore, they have a history of increasing their yields. To get an idea of the stocks in this category just Google "dividend stocks" and you'll come up with all kinds of listings. Finance magazines such as Barron's, Kiplingers. Money etc. constantly provide lists of attractive dividend payers as well.

But what about the possibility of the market dropping? After all, at this point we are in retirement and as commenters like to say "retirees don't have much time for the market to recover after a downturn". This actually isn't too great an issue in my view if you frame the process appropriately.

Think about the first two alternatives: an annuity and a Treasury Note. In each instance we did the investment and then whatever happened to the market didn't matter. Think also about your Social Security. Does a market downturn have any impact on Social Security?

The point here is that once you have invested the main concern is with your income stream not with the market value of the portfolio. Odds are that with some basic principles your income stream should increase as your stocks increase their dividends. If over time your portfolio rises in value it's basically gravy. If it drops it is no big deal, again as long as your income stream holds up.

What are the basic principles? First, limit the size of specific company holdings to 5% of total assets. This limits the impact of a negative event. Secondly, be careful about industry diversification. For example, choose Verizon or AT&T but not both. They are in the same industry. Choose one or two energy companies, utility companies, banks etc. If you extend to riskier companies invest 2.5% of total assets. You'll find business development companies that offer, for example, double digit yields. Always remember that extra yield means extra risk.

A negative for this approach is that it takes time. The first two approaches ran themselves. Not the dividend portfolio. But some retirees find that creating a dividend portfolio and managing it is a great "hobby" in retirement. As you get into it you find numerous opportunities, on an ongoing basis, to increase yield and improve the portfolio. The bottom line is that it can pay off nicely for the retiree willing to put in the effort.

A Couple of Good Reads

This is the time of year where financial writers like to recommend mutual funds for the coming year. Do you follow their recommendations?  If so, do yourself a favor and read The Best Mutual Funds to Buy Right Now! by Andrew Hallam.

Another good read is at MarketWatch by Robert Powell:  You may need less retirement income than you think.  The article illustrates to me that the whole subject of retirement planning is treated simplistically by researchers, and individuals should be aware of this.  Even going beyond the excellent points made in the study cited by Powell is the fact that individuals vary in the amount they spend during their retirement years.  Many spend heavily at first, doing the traveling or other expensive endeaors they have dreamed of, get it out of their system, and then settle in.  A decade then follows where spending may be somewhat less and even less than the 80% cited by Powell.  Closer to the end, or as Ed Slott is fond of saying "when the life insurance matures," medical costs ramp up.  The point is that spending in retirement is generally more complex than generally made out to be, and it is less cumbersome for researchers to just use simple percentage rate drawdowns.

Joe Learns About Risk - In the School of Hard Knocks

Suppose you had enough money to put in Treasury notes so that you could live off the interest.  Would you be set for a risk-free, secure retirement?

You probably have guessed that the answer is no.  I found over the years, however, this wasn't an easy argument to make.  There were people who would show me their portfolio - 100% U.S. Treasuries - and explain that they could retire on the interest.  They would then say that they were taking no risk.

This is where the professional can add value.  He or she points out that there are different kinds of risk. Granted that U.S. Treasuries have zero credit risk, but they do have interest rate risk, reinvestment risk, and inflation risk. Let's examine this.

Joe - the First 10 Years

Let's go back 20 years.  Let's meet Joe, a composite of many who have approached me over the past 20 years to talk markets and investment strategy.  Joe explained that he didn't have to take risk because he had diligently saved and now, in 1992, had his assets all in the 10-year Treasury note throwing off $40,000/year.  Along with Social Security, he was looking forward to a great retirement.  Joe was 60 years old.

In 1992 the 10-year Treasury note yielded 6.73%.  Joe had $595,000 invested in 10-year Treasury notes to produce $40,000/year income.  In 2002, when the 10-year Treasury matured, the yield on the 10-year was 4.49%.  Now his $595,000 was producing $26,715.  Uh oh!

But this wasn't nearly the whole story.  Inflation had eroded the value of the dollar over this 10-year period to $0.78!  Thus, the $26,715 was equivalent to $20,837!  Thankfully, his Social Security had kept up with inflation; but, sadly, ten years into retirement and Joe had to change his lifestyle in a big way.

As an aside, you see a lot written about retirees running out of money.  In real life, what happens is they change their lifestyle.  In other words ,if they make mistakes, then it means they don't eat out as often, take the trips they planned, repair the roof, etc.

Joe - the Next 10 Years 

The ensuing 10 years saw Joe's position deteriorate even more.  Today he has his Treasuries maturing and the reinvestment rate is 1.43%.  Furthermore, inflation has significantly eaten into the real spending power of his Treasury Note interest.  Joe is 80 years old and in a precarious position.

Conclusion

I tried to explain to Joe when he was 60 years old that there are different types of risk.  I suggested (pleaded, in some cases) for him to put at least 30% in a well-diversified equity portfolio.  I tried to explain that, by doing so, he actually reduced his risk.  Incidently, $100,000 in equities would have grown to approximately $400,000 today.  But, my advice to Joe was mostly to no avail.  He had his mind made up.

Today, of course, I see people all the time who have their money in money market funds.  Some are fully invested in CDs.  They tell me they don't want to take risk.  Some things never really change.

Kiplinger Quiz "Are You Saving Enough For Retirement ?"

Take this short quiz to see how you stack up against over 32,000 others who have taken the quiz.  This quiz is part of an article by Mary Beth Franklin, Don't Run Out of Money in Retirement.

A couple of points in the article worth mentioning.  First, recent research by Webb and Wei Sun of China's Remin University found that basing withdrawals on the required minimum distribution approach set forth by the IRS may be optimal.  RMDs are required at 70-1/2 and are based on an individual's life expectancy.

A second point, made at the very end, is that rules of thumb can be dangerous.  The withdrawal rate needs to be constantly reevaluated.  For instance, for much of the period over which studies are performed, bond prices rose as stocks declined.  In other words, bonds acted as a hedge.  Today markets face yields at historical lows, and the possibility exists that both fixed income and equity markets could decline at the same time over a protracted period.  This is just one significant way that the present environment differs compared to the past.  Others include medical costs and globalization.  The point is to reevaluate at least yearly.

Would You Take a Lump Sum for Social Security?

Often retirees are offered a choice between a lump sum payment and a pension when leaving a company.  My question is:  would you prefer a lump sum at age 62 or the specified CPI adjusted social security payment for as long as you live?  Assume that the Social Security payment is guaranteed.  Note that taking the lump sum gives you control of the assets, as well as a legacy when you die--assuming there is something left.  Note as well that you have the money to invest and could run up the value if you are an astute investor and the markets are friendly.

To put numbers on it, assume you are 62 today and you can get $2,000/month or a lump sum of $420,022.  Quote was from Berkshire Hathaway Group.

Lump sum or Social Security?

The First Thing You Need to Know About Retirement

Source:www,capitalpixel.com

One of the first steps in retirement planning is figuring out where your income will come from as you transition from receiving a career paycheck to receiving a paycheck from Social Security, your nest egg, a pension, and possibly other sources.

Today, you can find out how much you can expect to receive from Social Security by spending a few minutes online to create an account. If this was a recipe on the Food Network, it would be rated at the "Easy" level.

Go to www.socialsecurity.gov/mystatement/.  Create an account. Write down your password and the answers to the security questions in a safe place (especially if you are approaching the age where you plan to start taking Social Security!).

You'll come to a page that shows the amount you are expected to receive if you begin at "Full Retirement."  Next click "View Estimated Benefits" as shown:

Source: Social Security Administration

This will give you three numbers:  amount you would receive today (if you are over 62 years old), amount you can expect to receive at your full retirement age, and amount you can expect to receive at age 70.

This, of course, is an important first step in retirement planning.  At what age to take Social Security is the next step, and here a number of variables and assumptions come into play including spousal benefits, longevity assumptions, other sources of income, etc.

While you are on the site, be sure to check that your earnings record is correct.  If you are looking for a source that analyzes the question of when to take Social Security, check out A Social Security Owner's Manual by Jim Blankenship.

If you are looking to do a good deed on this beautiful Memorial Day, pass this information on to someone you think might find it useful.

Create Income in Retirement

Source: www.capitalpixel.com

There are two kinds of people in my world:  accumulators and decumulators.  I try to get the accumulators - those contributing to their nest egg on a regular basis - to look at the current market craziness as an opportunity.  They should care about the market 10, 20, 30 years from now.  Volatility presents an opportunity. Decumulators, on the other hand, have to be careful and ensure that they have a plan to handle volatile markets.

One product that can help in this, and which I've discussed on several occasions, is the single premium immediate pay annuity (SPIA).  This creates an income stream and essentially is a way to get back to a defined benefit situation.

One product I haven't mentioned is longevity insurance.  The concept is similar.  Pay a lump sum today for a guaranteed income when you reach 85 years old, say. This is an insurance product.  Die at 84, and you have received the comfort of knowing you would not run out of money but nothing more.  Live to 108 years old and you win, and you have an income to the end.  Best of all, it is relatively inexpensive.

An excellent overview of these products is given in Seeking Pension Replacement in Retirement by Mark Miller of Morningstar.  I would recommend that retirees and those entering retirement carefully read this article.  In fact, if you know any retirees (your parents, for example), have them read the article.

Also, if you are a member of AARP, send in the postcard from their monthly magazine to New York Life to get a quote.  Get a quote from Met Life.  A little research can save a couple of bucks.

Important caveats:  only consider a SPIA (other types of annuities can be hazardous to your financial health) and understand that, when you purchase an annuity, you lose control of the funds!

Disclosure:  I don't sell insurance and do not have a license to sell insurance.  This information is for educational purposes only.  Individuals should get professional advice based on their specific situation before making investment decisions.

Monte Carlo Analyses - Useful or Not?

Financial planning is challenging because of the number of unknowns.  We reach a point where we aren't generating a career-type paycheck, from which date we need to generate an income.  We don't know how long we need to generate an income, the rate of inflation, or what market performance will be.

We can start by making point assumptions on the unknowns.  We can assume we'll live to be 100, inflation will average 3%, and our investments will earn 7%.  Then, given the desired income and our income sources, we can see whether our plan will succeed.  As we think about this, we realize that it is way too simplistic.  One important observation is that sequence of market returns and inflation are important.

An "elegant" way around this problem is to carry out a Monte Carlo analysis where many paths are generated for inflation and market returns.  Then, of the paths generated, we can get a percent of success determination (I hesitate to use the term "probability" because we are using a sampling technique - it is not exactly like flipping a coin which is, in fact, a probability).

I put elegant in quotations because, like many things mathematical, a Monte Carlo analysis can project a greater degree of determination than is actually obtained.  As such, it has the potential to be abused by  practitioners to present an aura of expertise.
 
Suppose 80% of the paths succeed?  What does this tell us?  Is it good practice to report to a client that his plan will "fail" 20% of the time?  Does it require more elaboration?  To put it bluntly - does a Monte Carlo analysis with an 80% success ratio mean that 20% of the time the client will end up eating dog food?  Is the client hearing what we are trying to convey?

This issue has been examined by Michael Kitces in Do Our Brains Really Even Know How To Evaluate A Monte Carlo Analysis? on his blog Nerd's Eye View.  Michael is perhaps the brightest young financial planner in the country, and his blog is a must-read for those interested in the cutting edge of financial planning research.

My own take is that Monte Carlo analysis is valuable at higher rates of failure.  For example, if the failure rate is 60%, you probably need to work longer, save at a greater rate, or draw down a smaller income stream.  On the other hand, if the failure rate is 20%, then examining flexibility issues comes into play.  Can the client cut down on spending for a few years to get back on a successful path?

The good part of all this, I think, is that it gets the planner and the client to focus on the dynamic nature of the process.  Financial plans need to be revisited.

I think we may even have to take a step back and reconsider what we mean by "success."  "Success" is defined as "not eating dog food" in the Monte Carlo results.  Many clients, however, define
success as dying broke.  The client who ends up with $4 million in the analysis is a "success" but not so according to his or her goals.  The real success metric may be the percentage of paths leaving a client with $100,000 or less.

For those interested in an easy-to-use program based on  Monte Carlo simulations, I recommend the T. Rowe Price Retirement Calculator.  It is free and straightforward.  Use it at least annually.

Understand the Case for Dividends

Source: www.capitalpixel.com

It's no secret that the Federal Reserve has been on a mission to push investors into higher-yielding, riskier assets.  By pledging to hold the federal funds rate - the rate at which banks lend reserves to each other - in a range of 0 - 0.25% ( the so-called "zero bound"), they affect rates on short-term, less risky assets across the board.

Naturally, investors have found their way to both longer-term riskier bonds as well as dividend stocks.

To examine the attraction of a dividend paying stock compared to a bond, let's consider common stock for Sandy Spring Bank (full disclosure:  I own this stock), which recently announced a dividend increase (ticker SASR), and the benchmark 10-year Treasury.

Here's the announcement for SASR:

Sandy Spring Bancorp, Inc., (SASR - News), the parent company of Sandy Spring Bank, announced that the board of directors has declared a quarterly common stock dividend of $0.12 per share payable May 16, 2012 to shareholders of record on May 9, 2012. This dividend represents a $0.02 per share increase over the dividend paid in the first quarter of 2012.
Source: Global Newswire

IMPORTANT DATES

Note the record date of 5/9/2012.  This is the date the stock has to be held.  Note the payable date of 5/16/2012.  These are the 2 dates shareholders need to know.  On 5/9, the stock will go ex dividend.

There are also simple rules that affect whether the dividend is qualified or not that income investors need to know to capture lower tax rates.  Essentially the dividend will qualify if it is a U.S. stock and is held for 2 months over the 4-month period beginning 2 months before the ex-dividend date.  If you are playing it close to the vest, just call a rep at your brokerage and ask.  The tax break is what pays you to take the risk!

Returning to SASR, the .12 quarterly dividend implies a yield of 2.69% ( .48/17.87).  At the previous dividend, the implied dividend yield was 2.24% (.40/17.87).  In contrast, the yield on the 10-year U.S. Treasury note is 1.93%.  The coupon yield is 2%.

In comparing the two, a primary consideration is that there is a good likelihood that the stock dividend will be increased over time whereas the payout on the bond will remain constant over 10 years. 

The risk, of course, is that SASR stock may move a lot lower over the next 10 years.  On the positive side, if it moves higher, it is pretty much gravy for the income investor.  In contrast, the 10-year Treasury price is known for certainty 10 years hence.  At maturity it will be par, i.e. $100 per $100 principal. 


If you are interested in using stocks to generate income, you may want to follow dividend bloggers like Dividend Growth Stocks or consider dividend ETFs like SDY or DVY.

Disclosure:  I and my clients hold stocks and ETFs mentioned above.  The intent of this post is educational.  Individuals should do their own research or consult a professional before investing.

Spending the Nest Egg (Con't.)

Yesterday we took a slightly different way of looking at spending the nest egg.  We examined a $1.0 million nest egg and assumed a $40,000/year payout (4% rule of thumb), adjusted for inflation of 3% over the first 10 years.  We met the required payout by using zero coupon Treasury bonds.  This process is referred to as "immunizing a liability stream."  It is sometimes used to meet pension fund obligations.

We found that, with today's interest rates, this cost us $430,440.

We next looked at the required return to grow the remaining balance of $569,560 ($1,000,000 - $430,440) back to $1,000,000 at the end of the 10-year period.  It was 5.7%.

At this point, we are 75 years old and we have our original $1,000,000 back.  We now need to start with a payout of $52,191, adjusted for inflation, to maintain our standard of living.

Before we move to the next 10 years--ages 76 to 85--let's revisit the assumptions.  We calculated a return of 5.7% to get us back to $1.0 million.  Let's assume this was attempted with an allocation of 50% stocks/50% fixed income which was gradually adjusted to 40% stocks/60% fixed income. Obviously there is no guarantee on the return.  What would our starting value for the next 10 years be if the return averaged 4%/year, say?  This is easy to figure out - $569,560 * (1.04)^10 = $843,088.  In this way, you can carry out all of the sensitivity analysis you want.

In thinking about the asset allocation return, you want to recognize that, although you are retired, these assets are earmarked for somewhat longer-term expenditure requirements.

On the payment side, we assumed inflation of 3%.  If you are doing this in a spread sheet, you can easily adjust inflation.  For example, you can examine the impact if inflation jumps to 4% 5 years from now.

The bottom line of all of this is that retirees, in carefully monitoring their nest egg paydowns, need to revisit the schedule at least annually and put in actual market performance as well as inflation experience.

76 - 85

The table shows us that our costs of immunizing the required payments for ages 76 - 85 total $407,875.  This is what it costs to buy zero coupon Treasury bonds that will generate the payments.  We started with $1.0 million and now have $592,125 at the start of the period from which to get payments for years 76 on.

If we can achieve an average annualized return of 5.38% over the 10-year period, we will start our 86th year with $1.0 million.

Additional Points

What we've looked at is akin to a  poor man's offshoot of what is known as optimal control theory, which uses linear programming techniques to optimize a multi-period problem.  It goes to the end of the period - for example, our 95th birthday - and asks how much we would need, on an inflation-adjusted basis.  This would be $40,000 adjusted for inflation if our goal is to die broke on our death bed, assuming it occurs on our 95th birthday.  Then it works backwards, taking into account specified constraints.

In terms of data, quotes on zero coupon Treasury issues can be found at Barron's "Market Data" Center under "Bonds" and then "Treasury Strips."   For those who aren't clear on how zero coupon issues work, look at the table above.  If you buy $1,000 worth of the 2029 issue, it will cost you $598 today. In 2029, you will be paid $ 1,000.

As a point of information, U.S. Treasury zero coupon bonds are the most expensive (i.e., lowest yielding) because of their safety.  In fact, there are highly-rated zero coupon Corporate bonds that would greatly lower the cost of immunizing described above.

Disclaimer:  Data was obtained from sources deemed to be reliable.  Post is for educational purposes only.  Individuals should do their own research or consult with a professional before making investment decisions.

Spending the Nest Egg

Considerable research efforts have been directed to determine the appropriate nest egg withdrawal rate.  Many people seem to believe there is a single answer.  In truth, of course, there are too many unknowns including life expectancy, the rate of inflation, and market performance to produce a single number.  These unknowns give the problem a dynamic nature and mean that the retiree has to continually make adjustments.

In fact, there are two questions that sometimes are treated as the same. Some people want to know what rate can they spend at and have a high probability of not running out of funds.  Others are interested in the optimal rate of spending. T hey want to spend their last dollar as the plug is pulled.  If they follow the 4% rule-of-thumb and find they have $2.0 million on their death bed, they'll be upset and rant and rail about all the trips they could have taken, etc.

With this said, it is useful to run scenarios if for no other reason to at least get a feel for the nature of the problem.  As an added bonus, some readers will get some useful exposure to the arithmetic and issues involved.  The particular scenario I want to consider is as follows.  Suppose we are retiring today with a nest egg of $1.0 million, and we need an inflation adjusted cash flow of $40,000.  Note that I am conveniently neglecting taxes.  This is significant because taxes are the biggest single expense of retirees!  That's right - it's not medical expenses or anything else - it's taxes.  But taxes are messy, so we'll neglect them.

Let's assume 3% inflation.  The rate of inflation we assume is important because we are looking at a long run (hopefully!) situation.  Just as Enron was able to manipulate earnings by changing market assumptions on long-term contracts by a miniscule amount, the numbers will change here in a meaningful way if the inflation assumption is changed.  Keep that in mind.

To make this a bit different from other analyses of this type, let's think of matching our first 10-year payment needs ($40,000 adjusted annually for 3% inflation) with zero coupon Treasuries.  How much would this cost?  The Table shows the set-up.  It shows that, if inflation rises 3%/year, then by 2015 we'll need $43,709 to keep up.  To generate that payment of $43,709 in 2015, we can buy a zero coupon Treasury for $43,082.

Matching the required payments over the 10 years in this way requires $430,440.  This leaves $569,560 to invest today.  Working backwards, we ask the question of what return would it take to get us to our original $1.0 million by the end of the 10 years?

This is easy:  ($1,000,000/$569,560)^.10 = 1.057, or 5.7%.  In other words, if we can achieve an average annual return of 5.79%, we will be back to our original $1.0 million after satisfying our income needs for 10 years.

So, the good news is that we are 10 years older, have our $1.0 million in hand (especially good news for potential heirs), and have control of our money (in contrast to an annuity).  The bad news is that we have to generate $52,191 to start the next 10 years.

We'll continue with this next time.

The table presented here is really easy to do in a spreadsheet.  If anyone has questions, feel free to ask. Again, this whole exercise is useful, I think, in coming to understand the problem and challenge of generating an income off of a nest egg.

Annuity Puzzle

Bemoaning the demise of the defined benefit plan is a popular past-time. People used to have it easy when it came to retirement planning. Get a gold watch, and live off of Social Security and the company pension. Live within your means as you had your whole life.

Today we have to figure out the income we need, how to structure an investment portfolio, and whether we can sleep at night with the inevitable ups and downs of the market. We have to do involved, careful calculations to determine the safe withdrawal rate.

But there is a simple way to effectively convert at least a portion of a portfolio into a guaranteed income stream: buy a single premium immediate pay annuity (SPIA). That is, give an insurance company a lump sum and they will pay you for as long as you live. The amount you are promised is greater than you can generate yourself by buying bonds because you are paid on the basis of group mortality rates. Essentially you win if you live longer than average, and the insurance company wins if you don't. This is a bit of a simplification. Actually you gain from the peace of mind a guaranteed income can provide.

The question is why retirees don't take greater advantage of these types of annuities. Why don't they convert the uncertainty of an investment portfolio into a guaranteed income stream upon retirement? In fact, this is called "The Annuity Puzzle" as explained by Richard H. Thaler. One reason, Thaler points out, is that those retirees who die younger lose out. But on the other hand, live too long and draw down assets too aggressively and retirees will become a burden to their children.

There are a couple of other reasons why SPIAs aren't used as often as one would think. First, fee-only financial planner/investment managers (even though they are fiduciaries) won't recommend them because they reduce the bread and butter of their operations - assets under management. Secondly, interest rates are at historically low levels and a primary determinant of the payout is the level of interest rates.

Any retired person who met with a financial planner 5 years ago, when 10-year Treasury yields were above 5%, has a legitimate question if they weren't asked to consider SPIAs for a portion of their assets.

SPIAs also are somewhat complicated in that you need to diversify among insurance companies, buy inflation protection, and carefully read the fine print. You have to know what you want going in because insurance companies are notorious for selling products consumers don't need.

As always, it could pay to get a planner to look over any offerings to provide objective advice before purchasing.