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Monday, January 11, 2010

Achieving Sustainable Retirement Withdrawals: A Combined Equity and Annuity Approach

Journal for Financial Planning
by Craig Lemoine, CFP®; David M. Cordell, Ph.D., CFA, CFP®, CLU; and A. William Gustafson, Ph.D.

Executive Summary
  • This article contrasts sustainable retirement withdrawals from strategies with annuity components and strategies without annuity components.
  • The authors discuss today's market environment as it affects retirement planning strategies with and without annuity components.
  • This study evaluates common retirement planning strategies by analyzing the withdrawal stability for portfolios consisting of equity, fixed income, variable annuity, and fixed annuity assets.
  • This article uses replacement Monte Carlo methodology to determine retirement success over investor accumulation and withdrawal phases. The goal of each trial was to secure calculated retirement funding rather than to maximize wealth.
  • Five retirement portfolio strategies are evaluated: (1) 50 percent in equities and 50 percent in bonds, (2) 100 percent in equities, (3) a combination of equities and bonds in which the equities percentage is calculated as 128-minus-attained-age, (4) a variable annuity with a 5 percent withdrawal rate, and (5) 100 percent equities with a fixed annuity lock.
  • Different rebalancing strategies were modeled to capture any variances between frequency. Portfolios composed of a higher portion of equities outperformed those with a higher portion of bonds. The trials using 50 percent equities and 50 percent bonds yielded the lowest chance of success. Attempting to reduce portfolio risk by reallocating to fixed-income assets annually is less likely to provide long-term success than an allocation that remains fully invested in equities.
  • The results indicate that using an equity portfolio with a fixed annuity component provides a higher chance of maintaining retirement distributions than other alternatives.
Craig Lemoine, CFP®, is an assistant professor of financial planning at the American College. He also works with retirees and is completing a doctoral dissertation at Texas Tech University.
David M. Cordell, Ph.D., CFA, CFP®, CLU, is director of finance programs at the University of Texas at Dallas.
A. William Gustafson, Ph.D., is an associate professor at Texas Tech University.