Achieving Retirement Income Security: A Comparison of Guaranteed Lifetime Withdrawal Benefit, Systematic Withdrawal and Partial Variable Annuity Strategies
Retirement-income products often try to achieve multiple conflicting goals, including guaranteed income, inflation protection, liquidity, asset growth and estate potential.
This study gauges the effectiveness of three retirement-income strategies:
- Guaranteed Lifetime Withdrawal Benefit (GLWB) – This insurance product provides a guaranteed minimum lifetime income, asset liquidity and potential for added income through portfolio gains, but also entails higher annual fees than alternative strategies.
- Partial Variable Immediate Annuity (Partial VIA) with a liquid-asset account – This combination offers protection against longevity risk, some asset liquidity and potential for increases through portfolio gains, but does not guarantee a minimum income because the VIA payments are based on the performance of underlying investments.
- Systematic Withdrawal – A retiree using this strategy draws a fixed amount of cash annually from personal assets. This approach, relative to the others, gives the retiree the most flexibility and control over savings, but the retiree bears all income-related risks.
The researchers analyzed historical asset return and inflation data since 1926 to simulate the outcomes a retiree would achieve using three income strategies. They conducted the analysis by running portfolio simulations using returns for a hypothetical investment portfolio with portfolio weights of 50% allocated to an S&P 500 Index fund, 35% to a government bond fund and 15% to a corporate bond fund. Assuming 40 basis points for annual administration charges, they ran this portfolio for successive 30-year periods beginning January 1926 (ending December 1955), with the last 30-year run beginning January 1985 (ending December 2014).
This approach provided simulated portfolio results for 709 distinct 30-year periods. For each simulation run, the researchers picked the starting month and year and calculated the actual net-of-fee monthly returns. Using a withdrawal amount as determined by a comparable GLWB product with a 5% rule, they calculated annual income and year-end balances over each 30-year period for the GLWB and alternative strategies. This measure allows for a comparison of annual income, the value of the income floor, inflation protection, the stock of liquid assets to cover emergencies, and the estate potential.