Make Sure Your Retirement Income Lasts

September 16, 2008
John Wesley, CFP&#174

Physician's Money Digest, January31 2003, Volume 10, Issue 2

There is no shortage of adviceabout how to invest forretirement. Just take a tripto your local bookstore if you're indoubt. There you'll find a plethoraof books on how to invest for yourfuture. Much less attention,however, is paid tomaking income last duringthe retirement years—something every futuredoctor-retiree needs toknow how to do.

Fortunately, there are 2methods available to helpensure that your neededretirement income lasts aslong as you do: the systematicwithdrawal ofmoney from a pool ofinvestments and the creationof a stream of lifetimeincome that includesan immediate life annuity.Both methods incorporatetaking income during retirement.


Risk involved:

The systematic withdrawal methodrequires that a retiree decide whatpercentage of an accumulation toreceive annually (or quarterly ormonthly, depending on the retiree'spreference). Control of the assets ismaintained, but of coursethere is no guarantee thatincome received in thisway will last a lifetime.You couldrun out of money becauseof overly generouswithdrawals, andthe risk is heightenedif there isa major downturnin the financialmarkets early inyour retirement.

Life annuities work by havingindividuals pool their income-generatingassets together. The annuityis purchased at the time of retirement,and the payout phase beginsright away. The life annuity providesincome that, by definition, cannotbe outlived. Moreover, an annuitycan be structured to cover both theannuitant (ie, the owner) and thesurviving spouse. One tradeoff isthat the amount the annuitant passeson to heirs may be less.


A recent TIAA-CREF study analyzedthe sustainability of a retirementportfolio when relying on lifetimeincome from an annuity, systematicwithdrawals, or both. Thestudy found that annuitizing a portionof one's retirement assets canmake it more likely to maintain agiven level of income in retirement—and may actually improvethe chances of passingsomething on to heirs.

Four types of portfolioswere examined: conservative,balanced, growth,and aggressive. Surprisingly,it was found thatthe aggressive portfoliowas less likely to run outof assets during a 25-to40-year time period thanthe conservative portfolio.But even with the aggressiveportfolio, there wasstill a significant chance(15%) that the entireportfolio would be exhaustedbefore the end ofa 35-or 40-year retirement.

The findings:

To assess the impact of annuitizationor lifetime income on the 4portfolios, computer simulationswere run. The likelihoodthat income levels woulderode dropped significantly, especiallywhen 50% was allocated to afixed-payment lifetime income option.In contrast, usingsystematic withdrawalsalone, agrowth portfolioran out offunds 12.6%of the timeover a 30-yearspan. But when50% of the growthportfolio was allocatedto the immediatefixed-life annuity, thefailure rate fell significantly to only 3.3%.

The fixed-payment annuity canhelp attain a targeted level of lifetimeincome and also can result in ahigher comfort level about investingthe remainder of a portfolio moreaggressively. Overall, the stablestream of payments from a fixedannuity can be an effective substitutefor the most conservative partof a portfolio. It's important to rememberthat when building a retirementincome strategy, differenttools can achieve different purposes.The right combination of strategiescan meet objectives, enhancefinancial security, and, most importantly,provide peace of mind.

John Wesley is the product

manager for TIAACREF's

PA Select family

of fixed and variable

annuities. The organization

is a major pension

and financial services

provider with approximately

$275 billion in

assets under management.

He welcomes

questions or comments

at 800-223-1200.