Managing a Retirement Portfolio: Do Annuities Provide More Safety?

Abstract

Even with the generally recognized “safe” withdrawal amount of 4% of the retirement portfolio starting balance, more than 5% of retirement portfolios will run out of money over a 30-year period. Bootstrap simulations were used to estimate the probability of outliving a retirement portfolio as increasing proportions of a tax-deferred account are annuitized. The impacts of Required Minimum Distributions and taxable Social Security income were incorporated into the analysis. Results indicate that annuities significantly extend the length of time the portfolio lasts, but the expected balance remaining (estate size) will decrease substantially, a trade-off of security versus a legacy. Advisors and planners may find the graphical exposition helpful when showing clients different tradeoff options.

Keywords: annuity, asset allocation, bootstrap, required minimum distributions, retirement withdrawals