New Study Assesses Use of Annuities in Wealth Management Strategies

Two industry-leading consultants have published a study that compares a range of wealth management strategies that are available to individuals in retirement.

None of the strategies are dominant on an overall basis, but certain approaches show clear strengths in terms of income generation, levels of wealth, and the impact on bequest motives.

The dramatic impact of product fees is also addressed.

Six different retirement strategies are discussed:

  1. Systematic withdrawal from mutual funds.
  2. Fixed payout immediate life annuity.
  3. Immediate variable annuity for life.
  4. Variable annuity plus guaranteed minimum withdrawal benefit (GMWB).  
  5. Mix of withdrawals from mutual funds and fixed payout immediate life annuity.
  6. Mix of withdrawals from mutual funds and fixed payout immediate life annuity--with gradual annuitization over time.

Source: Journal of Financial Planning

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How do they make legitimate comparisons of these different options?

They use financial models that simulate product performance under different economic scenarios.

The models will take random variables such as equity market returns, interest rates, etc and make tens or hundreds of thousands of simulations. The term "stochastic" refers to the random part of the financial model.

The results are looked at in terms of probabilities or percentiles, so there is nothing concrete or certain at all.

The output is comparative product performance under different scenarios and probabilities.