Managed Money and Annuities

Many investors are reluctant to increase their equity allocations in retirement, however. The use of an SPIA in the portfolio can help alleviate these concerns by placing a floor on income, allowing spending needs to be met while providing growth through the equity portion of the portfolio. The value of this approach is generally a function of three factors: the IRR and the subsequent income generated by the annuity, the investor’s spend rate, and longevity.

As might be expected from an insurance product, the SPIA allocation is most beneficial in non-average scenarios – greater than average life expectancy, or periods of below average returns, for example – the circumstances that most concern investors planning for or in retirement. Critically, it may allow for higher equity allocations, the key to sustaining and growing wealth (and spending) over time.

A further concern for many investors is legacy wealth, which is not directly addressed by the 4% rule. To measure this, we created what we call the Legacy Success Ratio, which is itself the sum of two ratios: 1) the percentage of desired spend that was actually spent over the measured periods; and, 2) the real legacy wealth left over as a fraction of the initial spend. This can be used to measure the overall success of the plan, both in meeting spending goals and in providing for the next generation.

A few considerations

At its heart, investing is about balancing risk and reward and, as such, the portfolio construction process always involves trade-offs.

Like any insurance product, annuities provide protection against lower probability outcomes –longevity risk being the most prominent. The insurance is not free, but it can add significant value in particular for investors who are risk averse, expect to live a long time, or are concerned about adverse market conditions or higher inflation.

The increased return scenarios are largely dependent on adding to the equity allocation, while the compounding value of equities generally assumes a multi-year investment horizon. The equity portion can provide further benefits as well, in the form of increased liquidity for those whose spending patterns may vary over time, and potentially higher legacy wealth.

For advisors engaged in the retirement planning process, providing investors with a clear understanding of both the rewards and the risks of combining annuities and managed money across multiple scenarios is critically important.


Investors are awakening to a new reality in retirement planning. The elimination of many traditional sources of retirement income (e.g., defined benefit plans), threats to Social Security, and growing life expectancies suggest that a re-thinking of historical planning assumptions is in order. The results of our study show that combining SPIA with a managed money allocation can help address many of these concerns, adding value across planning horizons, different spending rates, and market types.

This article was contributed by Horizon Investments, a participant in the ETF Strategist Channel.