Retirement Weekly: Deferred annuities are better deals than immediate annuities

by | Jan 20, 2023 | Stock Market

Not only does the early bird get the worm, he gets a higher annuity payout as well. That’s the finding of a new study that the National Bureau of Economic Research began circulating earlier this month. Entitled “Target Retirement Fund: A Variant on Target Date Funds That Uses Deferred Life Annuities Rather than Bonds to Reduce Risk in Retirement,” the study was conducted by John Shoven, an economics professor at Stanford University, and Daniel Walton, a data scientist at Uber Technologies.

The researchers constructed a hypothetical Target Retirement Portfolio (TRF) that, like a traditional target date fund (TDF), gradually reduces its equity exposure beginning at the age of 50. But instead of investing the proceeds of these equity sales in bonds, the researchers invested them instead in deferred annuities that begin their monthly guaranteed payments at age 65. They then calculated how much it would cost for the traditional TDF, at age 65, to purchase a single annuity that produces the equivalent monthly payout as the TRF’s annuity ladder. At this point the two portfolios produce the same monthly annuity payout, and their only difference will be how much the rest of their portfolios are worth. The researchers ran hundreds of simulations based on historical …

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