Insurance Overlays and Retirement Spending

Benjamin Franklin famously wrote that only two things are certain in life: death and taxes. Yet, although death is certain, longevity is not, which greatly complicates planning for retirement investors and their advisors. Insurance overlays, also marketed as contingent deferred annuities (CDA), insure against the risk of running out of assets early, thus helping retirement investors manage longevity risk. Importantly, investors retain control over their assets instead of having to transfer them to an insurance company, a hurdle that limits the appeal of traditional annuities.

A new Dimensional research paper, “Insurance Overlays and Retirement Spending: The Case of Protected Lifetime Income,” compares the spending trajectories for portfolios with and without an overlay. Specifically, the study looks at an insurance overlay with protected lifetime income benefits, whose value evolves closely with portfolio returns before account depletion.

Exhibit 1 presents the simulated results for a hypothetical investor who retires with a $1,000,000 balance in a 60/40 portfolio under four spending rules.

• Flexible: The investor spends 4.25% of the remaining balance each year.
• Insured flexible: The investor spends the prescribed insurance overlay income every year. This amount is 4.25% of the benefit base, which evolves with portfolio returns before account depletion.
• Fixed: The investor spends 4.25% of the initial balance, adjusted for inflation, every year.
• Insured fixed: The goal is to achieve the same target spending as under the fixed rule, using the “income banking” feature of the insurance overlay. When the insurance overlay income is above target, the extra income is banked for future use (i.e., to cover spending shortfalls in future years of poor returns).

As we can see, median spending under the fixed rule is constant through retirement, because the investor would run out of assets in less than 50% of scenarios. The outcome is the same for the insured fixed rule, meaning that the median insurance overlay income (along with banked income) was sufficient to sustain the fixed stream of consumption.

The flexible rule generates steadily rising income as the median account balance grows throughout retirement. In comparison, the median income under the insured flexible rule grows much faster early in retirement. The faster growth occurs because the benefit base that supports the income grows with investment returns and is not reduced by withdrawals. When the account is depleted, the benefit base stops growing, and income is fixed in nominal terms—therefore, it slowly declines in real terms. Nevertheless, even for a 30- or even 40-year long retirement, inflation-adjusted income remains above or comparable to what other spending rules would have achieved.

Since the benefit base of the insurance overlay varies one-to-one with returns, what happens when poor investment returns occur especially early in retirement? Exhibit 2 addresses the question by looking at the 10% of the simulations with the worst average portfolio return in the first five years of retirement. The fixed rule experiences a high failure rate: At around the 30-year mark, the median spending is zero, meaning that there is a greater than 50% chance that the account has been depleted by then. The flexible rule experiences a sharp drop in income, and spending remains below initial spending for most of retirement.

By contrast, both insured rules experience a temporary dip but recover quickly, because the benefit base of the insurance overlay is not reduced by withdrawals. Spending under the insured flexible rule continues to rise, then follows the gradual decrease as in Exhibit 1. Under the insured fixed rule, once spending returns to the target amount, it is sustained for the rest of retirement—a sharp contrast with the uninsured fixed rule. The results suggest that, despite their link with portfolio returns, insurance overlays are valuable when downside risk materializes.

In conclusion, insurance overlays may help investors spend down their retirement assets more efficiently while offering protection against the longevity risk. Now, what about the second part of Benjamin Franklin’s adage, taxes? Before account depletion, the tax treatment of the income funded through withdrawals depends on the tax management of the underlying investments. Insurance overlays thus can pair well with tax-aware investments, allowing investors to deal with both parts of Franklin’s famous quip.

January 1975–present

Compiled by Dimensional from CRSP and Compustat data. Targets all the securities in the eligible market with an emphasis on companies with smaller capitalization, lower relative price, and higher profitability, excluding those with the lowest profitability and highest relative price within the small cap universe. The index also excludes those companies with the highest asset growth within the small cap universe. Profitability is defined as operating income before depreciation and amortization minus interest expense divided by book equity. Asset growth is defined as change in total assets from the prior fiscal year to current fiscal year. The eligible market is composed of securities of US companies traded on the NYSE, NYSE MKT (formerly AMEX), and Nasdaq Global Market. Exclusions: non‑US companies, REITs, UITs, and investment companies. The index has been retrospectively calculated by Dimensional and did not exist prior to March 2007. Accordingly, the results shown during the periods prior to March 2007 do not represent actual returns of the index. Other periods selected may have different results, including losses. The calculation methodology for the index was amended in January 2014 to include profitability as a factor in selecting securities for inclusion in the index. The calculation methodology for the index was amended in December 2019 to include asset growth as a factor in selecting securities for inclusion in the index.

Prior to January 1975

Compiled by Dimensional from CRSP and Compustat data. Targets all the securities in the eligible market with an emphasis on companies with smaller capitalization and lower relative price. The eligible market is composed of securities of US companies traded on the NYSE, NYSE MKT (formerly AMEX), and Nasdaq Global Market. Exclusions: non‑US companies, REITs, UITs, and investment companies.

January 1975–present

Compiled by Dimensional from CRSP and Compustat data. Targets all the securities in the eligible market with an emphasis on companies with smaller capitalization, lower relative price, and higher profitability, excluding those with the lowest profitability and highest relative price within the small cap universe. The index also excludes those companies with the highest asset growth within the small cap universe. Profitability is defined as operating income before depreciation and amortization minus interest expense divided by book equity. Asset growth is defined as change in total assets from the prior fiscal year to current fiscal year. The eligible market is composed of securities of US companies traded on the NYSE, NYSE MKT (formerly AMEX), and Nasdaq Global Market. Exclusions: non‑US companies, REITs, UITs, and investment companies. The index has been retrospectively calculated by Dimensional and did not exist prior to March 2007. Accordingly, the results shown during the periods prior to March 2007 do not represent actual returns of the index. Other periods selected may have different results, including losses. The calculation methodology for the index was amended in January 2014 to include profitability as a factor in selecting securities for inclusion in the index. The calculation methodology for the index was amended in December 2019 to include asset growth as a factor in selecting securities for inclusion in the index.

Prior to January 1975

Compiled by Dimensional from CRSP and Compustat data. Targets all the securities in the eligible market with an emphasis on companies with smaller capitalization and lower relative price. The eligible market is composed of securities of US companies traded on the NYSE, NYSE MKT (formerly AMEX), and Nasdaq Global Market. Exclusions: non‑US companies, REITs, UITs, and investment companies.

Dimensional International Core Equity 2 Index

Compiled by Dimensional from Bloomberg securities data. Targets all the securities in the eligible markets with an emphasis on companies with smaller capitalization, lower relative price, and higher profitability, excluding those with the lowest profitability and highest relative price within their country’s small cap universe. The index also excludes those companies with the highest asset growth within their country’s small cap universe. Profitability is defined as operating income before depreciation and amortization minus interest expense divided by book equity. Asset growth is defined as change in total assets from the prior fiscal year to current fiscal year. The index monthly returns are computed as the simple average of the monthly returns of four subindices, each one reconstituted once a year at the end of each quarter of the year. Maximum index weight of any one company is capped at 5%. Countries currently included are Australia, Austria, Belgium, Canada, Denmark, Finland, France, Germany, Hong Kong, Ireland, Israel, Italy, Japan, the Netherlands, New Zealand, Norway, Portugal, Singapore, Spain, Sweden, Switzerland, and the UK. Exclusions: REITs and investment companies. The index has been retrospectively calculated by Dimensional and did not exist prior to April 2008. Accordingly, the results shown during the periods prior to April 2008 do not represent actual returns of the index. The calculation methodology for the index was amended in January 2014 to include profitability as a factor in selecting securities for inclusion in the index. The calculation methodology for the index was amended in November 2019 to include asset growth as a factor in selecting securities for inclusion in the index.

Dimensional Emerging Markets Core Equity 2 Index

Compiled by Dimensional from Bloomberg securities data. Targets large cap securities in the eligible markets with an emphasis on companies with smaller capitalization, lower relative price, and higher profitability. Profitability is defined as operating income before depreciation and amortization minus interest expense divided by book equity. The index monthly returns are computed as the simple average of the monthly returns of four subindices, each one reconstituted once a year at the end of each quarter of the year. Maximum index weight of any one company is capped at 5%. Countries currently included are Brazil, Chile, China, Colombia, the Czech Republic, Greece, Hungary, India, Indonesia, Kuwait, Malaysia, Mexico, Peru, the Philippines, Poland, Qatar, Saudi Arabia, South Africa, South Korea, Taiwan, Thailand, Turkey, and the UAE. Exclusions: REITs and investment companies. The index has been retrospectively calculated by Dimensional and did not exist prior to April 2008. Accordingly, the results shown during the periods prior to April 2008 do not represent actual returns of the index. The calculation methodology for the index was amended in January 2014 to include profitability as a factor in selecting securities for inclusion in the index. The calculation methodology for the index was amended in November 2019 to include asset growth as a factor in selecting securities for inclusion in the index.

S&P Global REIT Index

Shown gross of dividend withholding tax. S&P data © 2025 S&P Dow Jones Indices LLC, a division of S&P Global. All rights reserved.

Bloomberg US TIPS Index

Bloomberg data provided by Bloomberg. 

Dimensional Short-Term Extended Quality Index

Compiled by Dimensional using data provided by Bloomberg. Includes securities in Bloomberg US 3–5 Year Government, Credit Aaa, Aa, A, Baa indices, and Bloomberg US 1–3 Year Government, Credit Aaa, Aa, A, Baa indices. Securities can be over- or underweighted based on government/credit spreads. When the difference in yields between credit and government bonds is narrow, government bonds may be overweighted. When the difference in yields between credit and government bonds is wide, government bonds may be underweighted. Securities can be over- or underweighted with respect to their market cap weight based on credit spreads. When the difference in yields between AAA+AA and A+BBB is narrow, AAA+AA bonds may be held above market cap weight. When the difference in yields between AAA+AA and A+BBB is wide, AAA+AA bonds may be held below market cap weight. When the difference in yields between AAA+AA and BBB is narrow, BBB bonds may be held below market cap weight. When the difference in yields between AAA+AA and BBB is wide, BBB bonds may be held above market cap weight. The duration of the index is based on the term spread between the 3–5 year government/credit bonds and 1–3 year government/credit bonds. When the term spread is wide, the duration of the index can be longer than the duration of the Bloomberg US Credit 1–5 Year Index. When the term spread is narrow, the duration of the index can be shorter than the duration of the Bloomberg US Credit 1–5 Year Index. The duration of the government component is based on the term spread between 3–5 year government bonds and 1–3 year government bonds. When the term spread is wide, the duration of the index can be longer than the duration of the Bloomberg US Government 1–5 Year Index. When the term spread is narrow, the duration of the index can be shorter than the duration of the Bloomberg US Government 1–5 Year Index. Rebalanced monthly. The index has been retrospectively calculated by Dimensional and did not exist prior to January 2020. Accordingly, results shown during the periods prior to January 2020 do not represent actual returns of the index. Other periods selected may have different results, including losses.

Dimensional US Core Fixed Income Index

Compiled by Dimensional using data provided by Bloomberg. Includes securities in the Bloomberg US 5–10Y Government, Credit Aaa, Aa, A, Baa indices; Bloomberg US 1–5Y Government, Credit Aaa, Aa, A, Baa indices; and Bloomberg Remix Portfolio (TBA Proxy) Index. Securities can be over- or underweighted based on government/credit spreads. When the difference in yields between credit and government bonds is narrow, government bonds may be held above 50%. When the difference in yields between credit and government bonds is wide, government bonds may be held below 50%. Securities can be over- or underweighted with respect to their market cap weight based on credit spreads. When the difference in yields between AAA+AA and A+BBB is narrow, AAA+AA bonds may be held above market cap weight. When the difference in yields between AAA+AA and A+BBB is wide, AAA+AA bonds may be held below market cap weight. When the difference in yields between AAA+AA and BBB is wide, BBB bonds may be held above market cap weight. The duration of the index is based on the duration of its government/credit component and the duration of the Bloomberg Remix Portfolio (TBA Proxy) Index. The duration of the government/credit component of the index is based on the term spread between 5–10 year government/credit bonds and 1–5 year government/credit bonds. When the term spread is wide, the duration of the government/credit component can be slightly shorter than the duration of the Bloomberg US Aggregate Bond Index. When the term spread is narrow, the duration of the government/credit component can be moderately shorter than the duration of the Bloomberg US Aggregate Bond Index. The duration of the government component is based on the term spread between 5–10 year government bonds and 1–5 year government bonds. When the term spread is wide, the duration of the government component can be slightly shorter than the duration of the Bloomberg US Government Index. When the term spread is narrow, the duration of the index can be moderately shorter than the duration of the Bloomberg US Government Index. The index’s backtested performance is based on the performance of the government/credit component, the Bloomberg Remix Portfolio (TBA Proxy) Index, and the ICE 1M USD LIBOR Index. Rebalanced monthly. The index has been retrospectively calculated by Dimensional and did not exist prior to December 2021. Accordingly, results shown during the periods prior to December 2021 do not represent actual returns of the index. Other periods selected may have different results, including losses. Data includes composite data from multiple sources or custom blends.

Dimensional Global ex US Core Fixed Income Index (Hedged to USD)

Compiled by Dimensional using data provided by Bloomberg. Based on securities in the universe of the Bloomberg Global Aggregate Bond Index; includes global government bonds and global investment grade corporate bonds. Eligible currencies: AUD, CAD, CHF, EUR, GBP, and JPY. Within the universe, the index identifies the yield curves that offer higher expected returns and the duration ranges on those yield curves offering higher expected returns, and assesses the increased expected returns associated with allocation to bonds with different credit qualities. It then overweights (with respect to their market cap weight) bonds of yield curves, duration ranges, and credit qualities that offer higher expected returns. It also employs credit quality, currency, and duration requirements relative to the eligible market. Rebalanced monthly. The index has been retrospectively calculated by Dimensional and did not exist prior to October 2023. Accordingly, results shown during the periods prior to October 2023 do not represent actual returns of the index. Other periods selected may have different results, including losses.

Dimensional Global Credit Bond Index (Hedged to USD)

Compiled by Dimensional using data provided by Bloomberg. Based on securities in the universe of the Bloomberg Global Aggregate Bond Index and includes global investment grade corporate bonds, global supranationals bonds, global sovereigns bonds, global foreign agency bonds, global foreign local authorities bonds, and US local authorities bonds. Eligible currencies: AUD, CAD, CHF, EUR, GBP, JPY, and USD. Within the universe, the index identifies the yield curves that offer higher expected returns and the duration ranges on those yield curves offering higher expected returns, and assesses the increased expected returns associated with allocation to bonds with different credit qualities. It then overweights (with respect to their market cap weight) bonds of yield curves, duration ranges, and credit qualities that offer higher expected returns. It also employs credit quality, currency, and duration requirements relative to the eligible market. Rebalanced monthly. The index has been retrospectively calculated by Dimensional and did not exist prior to October 2023. Accordingly, results shown during the periods prior to October 2023 do not represent actual returns of the index. Other periods selected may have different results, including losses.