I’m changing tracks a bit this month. I got an email asking about annuities and annuity alternatives. There’s no single way to look at this, so I’ll post analyses looking at it several different ways.

This month’s analysis is very simple, put a lump sum of money into the S&P 500, and take out only dividends and a small percentage of the underlying capital. This is very different than an annuity, which pays the same amount (possibly with an annual inflation adjustment) every year. There are many variations of annuities. You can get a good introduction on Investopedia to learn the basics.

Today’s analysis runs from 1970 through 2016, and all of the results are inflation-adjusted.

If there is enough capital to live off of only the dividends, this strategy would have worked out fairly well over the study period. The annual inflation-adjusted payout was reasonably consistent through the mid 1980’s, at which point growth in the stock market and corporate earnings allowed the annual payout to appreciate substantially. By the end of the study period, inflation-adjusted annual payout was more than twice the initial value, and underlying asset value was more than three times the initial asset value.

Taking out even a small percentage of capital each year as payout had a significant effect. While the annual payout over the study period was reasonably maintained, the portfolio value was not. Over a longer period of time, it’s likely the payout would reduce substantially as well.

Take a look at the analysis and let me know if you have any questions, or variations you’d be interested in seeing.

I love hearing from my fellow investors, so if there’s anything you’re interested in please send me an email:

joseph AT StockMarketMovement.com