The chance for retirement income security can be improved depending on the withdrawal strategy — or strategies — used when plan participants start to draw on their benefits. However, the participants’ goals can affect which strategy provides the best results for their particular situation.

Those are some of the findings in a paper from the TIAA Institute, which examined three strategies — a guaranteed lifetime withdrawal benefit, a systematic withdrawal, and a partial variable immediate annuity — and concluded that while each offer advantages, none are able to satisfy all the goals of all retirees, despite attempts by many retirement products within each category to do just that. Instead, a combination provides the best results for the greatest number.

Retirees, the paper says, “desire products that provide retirement security, inflation protection, liquidity, asset growth and the potential for an estate.” However, some of these goals actually conflict with others, making it impossible to fulfill all those goals in ways that are satisfactory to retirees.

The paper said that, “[w]ith the exception of retirement income starting dates at the beginning of the Great Depression, all three strategies performed well in providing income throughout retired life.” But when it comes to “peace of mind,” the partial variable immediate annuity and guaranteed lifetime withdrawal benefit strategies perform better, while the systematic withdrawal strategy provides retirees with the greatest flexibility in managing their retirement assets.

Yet “[a]ll three strategies come at a cost, either in terms of loss of liquidity (annuities), retirement income security (systematic withdrawals), or fees (guaranteed lifetime withdrawal benefit).”

Using historical monthly returns data, the study compares the three strategies, and found that, although “conventional wisdom” bet on a guaranteed lifetime withdrawal benefit product strategy designed to provide a guaranteed minimum amount of lifetime income, asset liquidity, and the potential for receiving additional income from portfolio gains would outperform the other two, such is not the case. Because of the typical cost of the guaranteed lifetime withdrawal benefit guarantee, the data indicates that most participants would have gotten similar or better outcomes without paying for the guarantee.

A simple systematic withdrawal strategy would have subjected the retiree to substantial retirement-related risks, so although most retirees would have received the same level of annual income, have greater liquidity and leave a larger estate relative to those who bought guaranteed lifetime withdrawal benefit guarantees, the added risk left them exposed to unexpected and potentially catastrophic expenses.

A partial variable immediate annuity providing guaranteed income for necessities while maintaining a reserve account for supplemental needs carries its own risks, including the assumed investment return, which can change with market volatility — perhaps not for the better.

The study shows that a hybrid income strategy that combines a variable immediate annuity with discretionary supplemental withdrawals from a separate liquid asset account protects against longevity risk, provides limited asset liquidity, and offers the potential to receive additional income from portfolio gains. Thus the hybrid strategy provides the best mixture of income generation, risk management, and estate potential for the majority of participants.

Instant Insights /

No retirement income plan satisfies all retirees' goals, paper says

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