Outlive My Retirement Savings? I Can't Go For That (No Can Do)

"I'll do almost anything that you want me to
But I can't go for that,
No can do."
Hall & Oates, 1981 #1 Hit



Prior to 2007, whenever Americans were asked about their retirement goals, the most common responses boiled down to "retiring early" and "accumulating as much wealth as possible." Asked the same question today, however, and the dominant answers are likely to be "dealing with healthcare expenses" and "not outliving my income."



Today, investors are demanding a smarter balance of growth and security to achieve their retirement goals effectively and to create a sustainable stream of lifetime income. The old "60/40" investment mix in retirement (bonds/stocks) will not sustain a retirement that can last 20-30 years.

A leading independent actuarial consulting firm studied the effectiveness of three popular investment strategies in creating a sustainable retirement income for various joint and single life retirement scenarios. Success was defined as annually meeting the needs of an inflation-adjusted income. The study assumed a $1 million investment, an initial withdrawal rate of 4.5 percent and annual inflation adjustment every year until death. The base case analyzed systematic withdrawals form hypothetical mutual fund portfolios comprising a combination of equity and fixed income. Next, the mutual fund portfolio was paired with an annuity providing a Guaranteed Lifetime Withdrawal Benefit (GLWB). Using a Monte Carlo analysis, the study sought to determine the best allocations to optimize chances for success in each case. Risk was defined as the probability of running out of money while still alive. Return was defined as the average amount of remaining assets upon death.

Mutual Fund Spend-Down Strategy

A balanced portfolio of 60 percent equities and 40 percent fixed income provided a maximum probability of success (82 percent) when using a mutual fund-only strategy. The best-case scenario for a mutual fund-only strategy suggested that one in five retirees could run out of retirement income prior to death.

Mutual Fund Spend-Down Strategy + Variable Annuity

Combining the mutual fund stratgegy and a VA with GLWB revealed that a 45 percent allocation to the VA with GLWB revealed that a 45 percent allocation to the VA and, for the remaining 55 percent of assets, a fund portfolio of 55 percent equities and 45 percent fixed income would be the most effective or optimal mix. However, the likelihood of success increased by just 3 percent to 85 percent. Withdrawals from the mutual fund portfolio would provide income during the first 10 years. Thereafter, lifetime benefit withdrawals from the VA combined with withdrawals from the mutual fund portfolio would fund the income stream. While there is improvement over the mutual fund spend down alone, there is still a one out of six failure rate, meaning a one in six chance of outliving your income.

Indexed Annuities (IAs) Enhance Odds of Success to 97.5 Percent

Finally, the study examined mutual fund systematic withdrawals paired with a contemporary IA with GLWB. The probability of success greatly enhanced, to 97.5 percent, when a 50 percent allocation to the IA was combined with a mutual fund mix of 25 percent equities and 75 percent fixed income. As with the VA/.mutual fund strategy, mutual funds would provide income for 10 years before lifetime withdrawals from the IA were initiated. With retirees seeking retirement income, this strategy provides the greatest probability of success, moving from a one in five or one in six failure rate to a one in 40 failure rate. That is a significant improvement as compared to the VA with GLWB strategy.

Know Your Options!

The significant improvement in the probability of success should capture the attention of pre- and post-retirees. Being in position for little to no market risk, a guarantee of principal, potential for portfolio growth and retirement income requires a series of well-executed plays. Improved retirement outcomes, flexibility to respond to a variety of needs and market conditions, and retaining control of the assets are driving today's retirement game. All these goals are achievable by combining the mutual fund drawdown strategy with a contemporary IA with GLWB.$

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