Today's blog post introduces another new research article, which follows from the article I introduced yesterday. This article provides my initial attempts to build an evaluation framework to compare and analyze any sort of retirement income strategy, including fixed and variable systematic withdrawals, fixed annuities, GLWBs, and building a floor with partial annuitization. This article is, "Choosing a Retirement Income Strategy: A New Evaluation Framework." After clicking on that link you do need
to follow through and click two more links and then you will have the
PDF of the article.
This article presents the initial stages of a new evaluation framework
for choosing among retirement income strategies. The investigation
includes eight retirement income strategies: constant inflation-adjusted
withdrawal amounts, a constant withdrawal percentage of remaining
assets, a withdrawal percentage based on remaining life expectancy, a
more aggressive hybrid withdrawal percentage, inflation-adjusted and
fixed single premium immediate annuities, a variable annuity with a
guaranteed living withdrawal benefit rider, and a strategy which
annuitizes the flooring level to meet basic needs and uses the hybrid
withdrawal percentage for remaining assets.
These eight strategies will
be analyzed with six retirement outcome measures over a 30-year
retirement period: the average amount whereby spending falls below the
minimally acceptable level, the average spending amount, the remaining
bequest at the end of the retirement period, the minimum spending amount
for any year in the retirement period, a measure of whether spending
increases or decreases over time defined as spending in the first year
divided by spending in the 30th year, and the value of total spending
after accounting for diminishing returns from increased spending for a
client with somewhat inflexible spending needs.
Do note that there is no mention of failure rates, as failure rates do not have much meaning here. What matters is how far income may fall as financial wealth is depleted.
The model is applied to
three client scenarios representing a cross-section of Retirement Income Industry Association’s client
segmentation matrix. These scenarios include a severely underfunded couple who would need a 15% withdrawal rate to meet their desired expenses, a constrained couple who would need a 6% withdrawal rate to meet their desired expenses, and an overfunded couple who would need a 3% withdrawal rate to meet their desired expenses.
It is built using Monte Carlo simulations which
reflect current market conditions, so that systematic withdrawals and
guaranteed products share compatible underlying assumptions.
It is hard to summarize the results, because it depends on the unique financial circumstances of retirees as well as their uniquely personal preferences about the tradeoffs between downside protection, upside spending power, and leaving a bequest. Please have a look!
