PLANSPONSOR - October/November 2018 - 19

DEFERRED ANNUITIES
DEFERRED ANNUITIES
DEFERRED ANNUITIES
A key risk for retirees is longevity risk - the peril of outliving one's
assets. While Social Security protects against this risk, for many
retirees these benefits are generally insufficient to meaningfully
hedge longevity - particularly for wealthier retirees. Annuities may
help as they are an insurance contract that can provide a guaranteed
stream of income for life.
A key risk for retirees is longevity risk - the peril of outliving one's
assets. While Social Security protects against this risk, for many
retirees these benefits are generally insufficient to meaningfully
hedge longevity - particularly for wealthier retirees. Annuities may
help as they are an insurance contract that can provide a guaranteed
stream of income for life.
ASSET ALLOCATION
ASSET ALLOCATION
ASSET ALLOCATION
Asset allocation is critical: An overly aggressive allocation can lead
to losses and reduce savings to a level that cannot sustain one's
income needs, whereas too conservative an allocation may not
provide sufficient income.
Asset allocation is critical: An overly aggressive allocation can lead
to losses and reduce savings to a level that cannot sustain one's
income needs, whereas too conservative an allocation may not
provide sufficient income.
PRINCIPAL DRAWDOWN
PRINCIPAL DRAWDOWN
PRINCIPAL DRAWDOWN
Figure 1: Case 1 model decision comparison:
$75,000 salary/$75,000 savings
A key risk for retirees is longevity risk - the peril of outliving one's
assets. While Social Security protects against this risk, for many
retirees these benefits are generally insufficient to meaningfully
hedge longevity - particularly for wealthier retirees. Annuities may
help as they are an insurance contract that can provide a guaranteed
stream of income for life.
Asset allocation is critical: An overly aggressive allocation can lead
to losses and reduce savings to a level that cannot sustain one's
income needs, whereas too conservative an allocation may not
provide sufficient income.
What is a reasonable level of principal drawdown for a retiree? Too
aggressive a drawdown may cause assets to be depleted to a level
where the retiree cannot sustain their lifestyle. Conversely, if the
individual utilizes too little of their capital, they may not enjoy the
quality of life that they are capable of.
What is a reasonable level of principal drawdown for a retiree? Too
aggressive a drawdown may cause assets to be depleted to a level
where the retiree cannot sustain their lifestyle. Conversely, if the
individual utilizes too little of their capital, they may not enjoy the
quality of life that they are capable of.
MODEL RESULTS: TWO CASE STUDIES
MODEL RESULTS: TWO CASE STUDIES
MODEL RESULTS: TWO CASE STUDIES
What is a reasonable level of principal drawdown for a retiree? Too
aggressive a drawdown may cause assets to be deplet d to a l vel
where the retiree cannot sustain their lifestyle. Conversely, if the
individual utilizes too little of their capital, they may not enjoy the
quality of life that they are capable of.
We show our model results for two very different individuals. In
Case 1 we show the optimal decisions for someone with moderate
income and low savings. This individual is assumed to have earned
$75,000 on average over their working career but holds only $75,000
in savings at retirement. At the other end of the spectrum, our Case
2 retiree has earned an average income of $200,000 throughout their
working career and amassed savings of $2,000,000. To be consistent
We show our model results for two very different individuals. In
Case 1 we show the optimal decisions for someone with moderate
income and low savings. This individual is assumed to have earned
$75,000 on average over their working career but holds only $75,000
in savings at retirement. At the other end of the spectrum, our Case
2 retiree has earned an average income of $200,000 throughout their
working career and amassed savings of $2,000,000. To be consistent
with real-world behavior, we constrain each individual to maintain a
positive savings balance, so that they don't fully spend down their
retirement savings. Specifically, we constrain both individuals to
retain 75% of their starting assets by age 85, on average.1
with real-world behavior, we constrain each individual to maintain a
positive savings balance, so that they don't fully spend down their
retirement savings. Specifically, we constrain both individuals to
ret rain 75% of their starting assets by age 85, on average.1
Case 1: Moderate salary/Low savings
Case 1: Moderate salary/Low savings
Case 1: M derate salary/Low savings
invests 9.4% in a deferred ann
all allocates 100% of his assets to equities.4
Figure 1 shows the optimal decisions for a 65-year-old with $75,000
in savings and Social Security benefits based on average earnings of
$75,000 throughout their working career.2
Figure 1 shows the optimal decisions for a 65-year-old with $75,000
in savings and Social Security benefits based on average earnings of
$75,000 throughout their working career.2
invests 9.4% in a deferred annuity that pays out in 20 years, and
allocates 100% of his assets to equities.4
y that pays out in 20 years, and
The aggressive equity
The aggressive equity
invests 9.4% in a deferred annuity that pays out in 20 years, and
allocates 100% of his assets to equities.4
ocation may seem counterintuitive; however, because of the high
fraction of consistent real income provided by Social Security, a high
level of equity risk contributes only a modest amount of volatility to
his retirement income, based on our assumptions. He draws down
2% of his portfolio on average each year, which yields an average
annual real income of $27,500. After age 85, his deferred annuity
begins paying out. The combination of Social Security and the
annuity provides a longevity hedge.
Our hypothetical retiree
The aggressive equity
allocation may seem counterintuitive; however, because of the high
fraction of consistent real income provided by Social Security, a high
level of equity risk contributes only a modest amount of volatility to
his retirement income, based on our assumptions. He draws down
2% of his portfolio on average each year, which yields an average
annual real income of $27,500. After age 85, his deferred annuity
begins paying out. The combination of Social Security and the
annuity provides a longevity hedge.
chooses to take his3 Social Security payment immediately at age 65,
allocation may seem counterintuiti e; however, because of the high
fraction of consistent real income provided by Social Secur ty, a high
level of equity risk contributes only a modest amount of volatility to
his retirement income, based on our assumptions. He draws down
2% of his portfolio on average each year, which yields an average
annual real income of $27,500. After age 85, his deferred annuity
begins paying out. The combination of Social Security and the
annuity provides a longevity hedge.
We show our model results for two very different individuals. In
Case 1 we show the optimal decisions for someone with moderate
income and low sa ings. This individual is assumed to have earned
$75,000 on average over their working career but holds only $75,000
in savings at retirement. At the other end of the spectrum, our Case
2 retiree has earned an average income of $200,000 throughout their
working career and amassed savings of $2,000,000. To be consistent
with re l-world behavior, we constrain each individual to maintain a
positive savings balance, so that they don't fully spend down their
etirement savings. Specifically, we constrain both individuals to
retain 75% of their starting assets by age 85, on average.1
Figure 1 shows the optimal decisions for a 65-year-old with $75,000
in savings and Social Security benefits based on average earnings of
$75,000 throughout their working career.2
Our hypothetical retiree
Our hypothetical retiree
Dollars
-
Figure 1: Case 1 model decision comparison:
$75,000 salary/$75,000 savings
% allocation/
decision
Stocks6
Bonds
Stocks6
Bonds
Social Security5
Deferred annuity
Principal drawdown
Total income7
Social Security5
Deferred annuity
Stocks6
Bonds
Principal drawdown
Total income7
Principal drawdown
Total income7
% allocation/
decision
Immediate
9.4%
Immediate
2.0%
100.0%
0.0%
9.4%
Figure 2: Case 2 model decision comparison:
$200,000 salary/$2 million savings
% of
100.0%
0.0%-
2.0%
-
-
Figure 2: Case 2 model decision comparison:
$200,000 salary/$2 million savings
% of
allocation/
decision
Social Security8
Deferred annuity
Stocks6
Bonds
Stocks6
Bonds
Social Security8
Deferred annuity
Principal drawdown
Total income7
Stocks6
Bonds
Hypothetical example for illustrative purposes only. The model output
included here is not based on any particularized financial situation, or need, and is not
intended to be, and should not be construed as a forecast, research, investment advice
or a recommendation for any specific PIMCO or other strategy, product or service.
PIMCO does not offer insurance guaranteed products or products that offer investments
containing both securities and insurance features. The model is limited to analyzing the
optimal retirement income stream. Investors should speak to their financial advisors
regarding the investment mix that may be right for them based on their financial
situation and investment objectives.
Source: PIMCO and the Social Security Administration as of 31 December 2017.
Principal drawdown
Total income7
Principal drawdown
Total income7
Case 2: High salary/High savings
Figure 2 shows optimal decisions for a 65-year-old with a savings
Case 2: High salary/High savings
Figure 2 shows optimal decisions for a 65-year-old with a savings
chooses to take his3 Social Security payment immediately at age 65,
chooses to take his3 Social Security payment immediately at age 65,
Hypothetical example for illustrative purposes only. The model output
included here is not based on any particularized financial situation, or need, and is not
intended to be, and should not be construed as a forecast, research, investment advice
or a recommendation for any specific PIMCO or other strategy, product or service.
PIMCO does not offer insurance guaranteed products or products that offer investments
containing both securities and insurance features. The model is limited to analyzing the
optimal retirement income stream. Investors should speak to their financial advisors
regarding the investment mix that may be right for them based on their financial
situation and investment objectives.
Source: PIMCO and the Social Security Administration as of 31 December 2017.
pool of $2 million and a Social Security benefit based on average
annual earnings of $200,000. This hypothetical individual's high
savings balance allows him to defer Social Security and finance the
first five years of retirement via the investment portfolio. Because the
majority of his income will be derived from investments, rather than
Social Security, he holds a much more conservative portfolio of 34%
equity/66% bonds, compared with the Case 1 retiree. As a result of
the significantly more conservative asset allocation, he allocates less
to the deferred annuity at only 3.2%. The Case 2 individual draws
down just over 2% of his portfolio, generating a real income of
$103,000/year for the first 20 years. Like the less wealthy retiree, after
age 85 his annuity begins paying out, which means he becomes less
reliant on the investment portfolio, and less exposed to the risk of
outliving his assets.
Case 2: High salary/High savings
Figure 2 shows optimal decisions for a 65-year-old with a savings
pool of $2 million and a Social Security benefit based on average
annual earnings of $200,000. This hypothetical individual's high
savings balance allows him to defer Social Security and finance the
first five years of retirement via the investment portfolio. Because the
majority of his income will be derived from investments, rather than
Social Security, he holds a much more conservative portfolio of 34%
equity/66% bonds, compared with the Case 1 retiree. As a result of
the significantly more conservative asset allocation, he allocates less
to the deferred annuity at only 3.2%. The Case 2 individual draws
down just over 2% of his portfolio, generating a real income of
$103,000/year for the first 20 years. Like the less wealthy retiree, after
age 85 his annuity begins paying out, which means he becomes less
reliant on the investment portfolio, and less exposed to the risk of
outliving his assets.
SPONSORED SECTION
pool of $2 million and a Social Security benefit based on average
annual e rnings of $200,000. This hypothetical individual's high
avings balance allows him to defer Social Security and fin nce the
first five years of retirement via the investment portfolio. Because the
m jority of his income will be derived from investments, rather than
Social Security, he holds a much more conservative portfolio of 34%
equity/66% bonds, compared with the Case 1 retiree. As a r sult of
t e significantly more co servative asset allocation, he allocates less
to the deferred annuity at only 3.2%. The Case 2 individual draws
down just over 2% of his portfolio, generating a real income of
$103,000/year for the first 20 years. Like the less wealthy retire , after
age 85 his annuity begins paying out, which means he becomes less
reliant on the investment portfolio, and less exposed to the risk of
outliving his assets.
Hypothetical example for illustrative purposes only. The model output
included here is not based on any particularized financial situation, or need, and is not
intended to be, and should not be construed as a forecast, research, investment advice
or a recommendation for any specific PIMCO or other strategy, product or service.
PIMCO does not offer insurance guaranteed products or products that offer investments
containing both securities and insurance features. The model is limited to analyzing the
optimal retirement income stream. Investors should speak to their financial advisors
regarding the investment mix that may be right for them based on their financial
situation and investment objectives.
Source: PIMCO and the Social Security Administration as of 31 December 2017.
33.7%
66.3%
2.3%
-
-
$1,283,568
-
-
-
$46,893
$103,000
$14,989
$8,718
$46,893
$103,000
Social Security8
Deferred annuity
allocation/
decision
Defer
3.2%
33.7%
Defer
3.2%
66.3%
2.3%
allocation/
decision
Defer
3.2%
33.7%
66.3%
-2.3%
allocated at
retirement
-
allocated at
retirement
$64,000
$652,432
Dollars
-
$1,283,568
$64,000
$652,432
-
-
$64,000
$652,432
$1,283,568
- -
Dollars
Figure 2: Case 2 model decision comparison:
$200,000 salary/$2 million savings
% of
-
Dollars
allocated at
retirement
100.0%
0.0%
-2.0%
Social Security5
Deferred annuity
% allocation/
decision
Immediate
9.4%
allocated at
retirement
allocated at
retirement
Dollars
$67,950
$7,050
-
$7,050
-
$7,050
- -
$67,950
- $0
$0
$67,950
$0 -
Dollars
allocated at
retirement
Figure 1: Case 1 model decision comparison:
$75,000 salary/$75,000 savings
Real income
first 20 years
$24,500
-
$1,523
$0
$24,500
$1,477
$1,523
$1,477
$27,500
Real annual
income first
20 years
Real annual
income first
20 years
$32,400
-
$8,718
-
$14,989
$32,400
$46,893
$103,000
Real annual
income first
20 years
$32,400
-
$14,989
$8,718
Real income
first 20 years
$1,523
- $0
$27,500
$0
$1,477
$27,500
Real income
first 20 years
$24,500
-
PLANSPONSOR - October/November 2018

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