Wednesday, October 31, 2012

Update on Retirement Income Market Conditions

I’m working to update the assumptions I use to explain “current market conditions” in my research. I have been using numbers from April 2012, but I’m updating these to late October 2012.

During those months, interest rates have continued to fall, which in turn has brought down SPIA rates. As well, realistically speaking, whatever the safe withdrawal rate was before or might be now, the lower interest rates also imply a lower safe withdrawal rate.

Yields for TIPS of up to 20-years to maturity are below zero. The difference between constant maturity Treasury yields and TIPS yields provide an imprecise measure of expected inflation, and the markets are expecting inflation rates of about 2.5% over the long-term horizon. This compares to a historical average since 1926 of just over 3%.

For a joint and 100% survivors annuity (which pays out the same amount until both members of the couple are deceased) for a 65-year old couple, the best payout from a highly rated company for a fixed SPIA is now 5.43%. For an inflation-adjusted SPIA, the best payout is 3.55%. The fixed SPIA rate is 53% higher, so it will provide more income until cumulative inflation of 53% occurs.

Though that difference is about the same before, perhaps what is more relevant is that the payout rate for an inflation-adjusted SPIA is just about the same as the payout rate for a SPIA that will provide an annual income growth rate of 3% regardless of the path of inflation. This can be interpreted as meaning that the annuity company is pricing inflation-adjusted annuities under an assumption that inflation will average 3%, which isn’t all that much higher than the current breakeven inflation rates. This helps to make inflation-adjusted SPIAs more attractive, especially for anyone who is particularly worried that inflation may turn out to be higher than what is currently built into market prices.

U.S. Government Yield Curve and Single-Premium Immediate Annuity Payout Rates


  1. I notice the 2% transaction fee of Income Solutions.

    Wouldn't the transaction be without a fee if one purchased directly through an insurance company sales agent?

    1. Sorry, I missed seeing your comment.

      My understanding is that the Vanguard platform adds an extra 1%. If you order through an advisor, there is only a 1% fee instead of 2%. Of course you have to compare that to the advisor's fees to see which is the better approach