Can you Beat SPIAs with Long-Term Bonds?

While single-premium income annuities (SPIAs) guarantee a specific income as long as the purchaser lives, their rates of return generally compare unfavorably with long-term bonds over normal life expectancies. This makes SPIAs look like the inferior investment, notwithstanding their value as longevity insurance. But considering the low level of interest rates and the potential for future volatility, SPIAs are still a good choice for many retirees.

Recent articles in Advisor Perspectives and elsewhere have focused on SPIAs.  For example, Manish Malhotra’s article, Making the Right Wager on Client Longevity, examined when an investor should purchase a SPIA; Joe Tomlinson considers a related issue in an article this week, Should You Wait to Buy a SPIA?; and Tomlinson’s article, Investing for Retirement: SPIAs, TIPS, Stocks and the 4% Rule, argued for the use of SPIAs to fund at least a portion of one’s retirement.

But retirees are naturally reluctant to cede control of their assets, so let’s consider whether fixed-rate nominal bonds can offer protection similar to that of a SPIA.

Suppose a very long-term bond purchased by a 65-year-old – say, a 40-year corporate – had a significantly higher expected internal rate of return than a SPIA, would that not make the bond the better option? The probability of surviving past age 105 is vanishingly small; at some advanced age, one must declare the probability to be effectively zero. Nevertheless, there is also the risk that the timing of cash flows from the bond may not match up with what the bondholder needs.

I will explore a scenario based on an investor whose only goal is to maximize the lifetime income he can receive with a high degree of certainty, assuming that money left over after the investor dies is of negligible value.


“Annuities” covers a broad range of investment vehicles. Annuities that require you to pay only for the insurance feature can be beneficial because there are inconvenient events for which you can’t self-insure (living too long, for example).

Insurance companies can do something that no individual can do – they can almost perfectly diversify the risk of selling annuities to some clients by selling life insurance to other clients. If sold in exactly the right amounts, the two will cancel out the insurance company’s longevity risk – in other words, the insurance company won’t care how long its policyholders live, because it will earn the same net income in any case.

Insurers are essentially facilitators of wealth redistribution from those who are in some sense more fortunate to those who are less so – for example, from the life-insured who live long, to those who die young; and from the longevity-insured whose income stream is cut short by death, to those who desperately need income for many years.

Annuities for which you pay a substantial fee for investment management as well as for insurance – such as most variable annuities – are generally a bad deal, however, because investment management is worth much less than is usually charged for it. Some variable annuities, for example, charge a combined total of 4% in annual fees.