The SPIA Strategy: Why ‘Buying a Pension’ Beats Bonds for Retirement Income
The SPIA Strategy: Why “Buying a Pension” Beats Bonds for Retirement Income
CORE INSIGHTS
- The Super Bond: A SPIA (Single Premium Immediate Annuity) acts like a bond that never defaults. It converts a lump sum into a guaranteed monthly paycheck for life.
- Mortality Credits: The secret sauce. Funds from those who die early are redistributed to survivors, boosting yields (7-8%) far above standard bonds. Moshe Milevsky, Ph.D.
- Risk Transfer: You transfer two major risks—Longevity (living too long) and Market Sequence—to the insurance company.
For retirees terrified of outliving their savings, the SPIA is the most mathematically efficient way to secure a “Safe Floor” of income. It beats the 4% Rule by adding “Mortality Credits” to your return.
The Yield Formula
Why SPIA Pays More:
- Interest: Insurer invests your money.
- Principal: Your own money returned over time.
- Mortality Credits: Bonus from the risk pool. Wharton PRC
*Result: Higher Safe Withdrawal Rate.
What-If Scenario: The $500k Income Portfolio
| Asset | Yield / Payout | Annual Income |
|---|---|---|
| Total Bond Fund | 4.5% Yield | $22,500 |
| SPIA (Age 70) | 7.8% Payout | $39,000 |
Visualizing the Income Gap
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*Figure 1: Income Floor Comparison. The Green Bar (SPIA) creates a much higher safety net.*
Strategic Action Steps
1
Determine the Gap
Calculate: (Essential Expenses) – (Social Security). Buy enough SPIA to cover exactly this gap. Don’t put all your money in.
Calculate: (Essential Expenses) – (Social Security). Buy enough SPIA to cover exactly this gap. Don’t put all your money in.
2
Shop for “Period Certain”
Add a “Cash Refund” rider. If you die early, beneficiaries get the remaining principal back. It lowers the payout slightly but removes the fear of loss.
Add a “Cash Refund” rider. If you die early, beneficiaries get the remaining principal back. It lowers the payout slightly but removes the fear of loss.
3
Ladder the Purchase
Don’t buy all at once. Buy small chunks at age 65, 70, 75. As you age, “Mortality Credits” increase, giving you better rates later.
Don’t buy all at once. Buy small chunks at age 65, 70, 75. As you age, “Mortality Credits” increase, giving you better rates later.
The Bottom Line: Who Should Choose What?
- Choose SPIA: Retirees who prioritize “Sleep Well” income security over inheritance.
- Choose Bonds: Retirees with a massive surplus (>30x expenses) who don’t need the extra yield.
What are Mortality Credits?
The unique component of annuity returns. Funds from those who die early are redistributed to survivors, boosting yields above standard investments.
Is the principal lost in a SPIA?
In ‘Life Only’, yes. But most choose ‘Cash Refund,’ which guarantees beneficiaries get any remaining principal back.
Why not just buy Dividend Stocks?
Dividend stocks have market risk. SPIA provides guaranteed income regardless of crashes. It replaces Bonds, not Stocks.
Disclaimer: This content is for informational purposes only. Annuity guarantees depend on the insurer. Consult a professional.