However, over time, partial annuitization shows better portfolio growth. The greater risk capacity afforded through partial annuitization allows remaining assets to be invested more aggressively. By the time the couple has reached 84, their liquid financial assets are actually higher with the partial annuitization strategy. Using data from the Society of Actuaries’ RP-2014 mortality tables for healthy annuitants, I calculated a 59% chance that at least one member of this couple will survive beyond age 84. This places the odds in favor of having more liquid financial assets at death when the couple’s assets are partially annuitized.

Note that by the time the surviving spouse reaches age 105, the portfolio with only investments is depleted. This is because I chose annual spending amounts that allow the portfolio to last 40 years. But even if the portfolio were depleted, the partial annuitization would allow some income continuation and also allow increasing upside potential in the event the surviving spouse lives a long life. The excess money that spouse receives from the income annuity—the “mortality credits”—supports an increasing percentage of the lifetime spending, more than what bonds would have been able to provide. The real legacy value at the person’s 105th birthday is more than $5.7 million with the partial annuitization.

In reality, clients would likely decide to use smaller annuitization amounts than 50%. They may also consider deferred income annuities rather than immediate annuities in order to better leverage the mortality credits at a lower cost to the portfolio. (Also in reality, clients would probably not be comfortable with a 100% stock portfolio.)

Nonetheless, the basic story will still hold. When retirement ends up being short, partial annuitization means a smaller (though perhaps reasonable) legacy. For longer retirements, it offers sound spending support while also fortifying a larger legacy. It is a more efficient retirement income strategy, and that is why I believe income annuities serve as a solid replacement for bonds in a retirement income portfolio.

Wade D. Pfau, Ph.D., CFA, is a professor of retirement income in the Ph.D. program in financial services and retirement planning at the American College in Bryn Mawr, Pa. He is also a principal and director at Watermark Adviser Solutions, helping to build model investment portfolios that can be integrated into comprehensive retirement income strategies. He actively blogs at See his Google+ profile for more information.

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