This Or That? Comparing Payout Rates Of A Fixed Annuity Vs. Investment Portfolio Distributions
May 13, 2020 by Wade Pfau
Retirement spending goals are often expressed in terms of inflation-adjusted spending numbers. This is what the 4 percent rule-of-thumb assumes. But as we move the discussion toward annuities, many annuities will protect a fixed amount of spending without inflation adjustments. It is not appropriate to compare the payout rate for a fixed annuity payment to the sustainable distribution rate from an investment portfolio that assumes inflation-adjusted spending. As such, Exhibit 3.14 repeats this analysis using the nominal portfolio return assumptions from “The Building Blocks of Portfolio Returns” which include a 6 percent return and a ten percent standard deviation.
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