*Handling a Fixed Annuity *

**This chapter addresses the issue of how to handle
withdrawals from a portfolio when a portion of your required income stream is supplied by
a fixed annuity. I did not see a way to analyze this with just the data available from the
Jarrett and Trinity studies, so I tried to find the portfolio size required to cover the
impact of inflation (over the specified 30 year period). In the first year the entire
annuity would be spent and no withdrawal would be made from the portfolio. In the second
year the annuity would be spent and the required increase due to inflation would be taken
from the portfolio. This was repeated each year and a portfolio was considered
‘successful’ if the portfolio lasted through the 30**^{th} year. I also
used the same range of asset allocations, the same rebalancing assumptions, etc. as stated
previously. The size of the initial portfolio was varied between 4x annuity amount and 10x
the annuity amount in increments of 1x.

**The results of this analysis are presented in three
tables:**

**1) The percent of the 54 cases (retirement starting years
from 1926 through 1979 inclusive) that left a positive balance in the portfolio at the end
of 30 years (***Click Here*).

**2) The median ending portfolio value (the number where
half the ending values were greater and half were less). Median seems more meaningful to
me than average in this particular case (***Click Here*).

**3) The third table is the same as the second table but
with the final value expressed as a percentage of the initial portfolio value.(***Click Here*)

**The results were quite interesting and are different from
the results of the Fixed withdrawal methodology referenced in the previous studies in
these two ways (among others):**

**Very aggressive equity allocations optimize both the end
portfolio value (true for the Fixed Withdrawal cases) and the worst case results (not true
for the fixed withdrawal case). The Fixed Withdrawal analysis optimized the worst case
scenario at 40% equities (probably closer to 50% but I didn't bother with that level of
analytical granularity). The bridge between these two differing sets of results is the
fact that a fixed annuity has some of the same characteristics as a bond. **

**The cost to get from an 80% probability to 100%
probability of portfolio success (based on historical data) is much higher in the fixed
annuity case compared with the case of no annuity. I played around with the numbers and
found that the portfolio size required to generate a 100% success rate divided by the
portfolio size required to generate an 80% success rate was around 1.4 for the case of
fixed, inflation-adjusted withdrawals from a portfolio (ala' Trinity/Jarrett). For the
case of inflation protection of a fixed annuity that ratio is closer to 2.0. Those last
few portfolio failures were truly tough to make go away in the case of a fixed annuity and
the stagflation of the 1970’s/early 80’s. My personal reading of the
Jarrett/Trinity data led me to planning assumptions revolving around the 100% success data
points. I may reconsider this for the fixed annuity case. **

**A suggested methodology for handling the case where part
of your income requirements are supplied by a fixed annuity is (for calculation purposes) to
separate your assets into two baskets:**

**A basket to provide inflation protection for the fixed
annuity **

**A basket to provide the income required in excess of the
fixed annuity. **

**The hypothetical case of a fixed annuity of $25,000 and a
requirement for an inflation adjusted retirement income target of $50,000, would
require the following asset base assuming the factors of 9 (inflation protection of the
fixed annuity) and .044 are chosen: **

**$25,000 x 9 + (50,000-25,000)/.044 = $793,000 (gulp)**

**There is nothing necessarily 'mathematically correct'
about the handling this problem as 'two baskets of money'. But it seems to me to be a
reasonable approach and should be a good upper bound. For those of you who are
mathematically oriented, this assumption is closer to correct when the conditions that
negatively affect the Fixed Annuity case and negatively affect the Fixed Withdrawal case
are well correlated. This tends to be the true (and unfortunately also generates the
highest required portfolio values).**

**Readers with retirement horizons longer than 30 years,
will need to make minor adjustments (something that is partially addressed in
the ***Withdrawals Forever* chapter).