PLANSPONSOR - October/November 2018 - 21

1
Absent this constraint, retirees fully spend down their savings and rely on income from the annuity for their remaining life in our model. In reality, very few retirees would be willing
to be so profligate. As such, we constrain agents to hold a positive wealth balance.
1
2
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.
6
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
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
The above is based on an abridged version of " Income for the Retirement Years: A New Model for Seeking Stable Retirement Income, " PIMCO In Depth, August 2018.
Past performance is not a guarantee or a reliable indicator of future results.
The analysis contained in this abridged paper is based on hypothetical modeling. No representation is being made that any account, product, or strategy will or is likely to achieve
profits, losses, or results similar to those shown. Hypothetical or simulated performance results have several inherent limitations. Unlike an actual performance record, simulated
results do not represent actual performance and are generally prepared with the benefit of hindsight. There are frequently sharp differences between simulated performance results
and the actual results subsequently achieved by any particular account, product, or strategy. In addition, since trades have not actually been executed, simulated results cannot
account for the impact of certain market risks such as lack of liquidity. There are numerous other factors related to the markets in general or the implementation of any specific
investment strategy, which cannot be fully accounted for in the preparation of simulated results and all of which can adversely affect actual results.
Figures are provided for illustrative purposes and are not indicative of the past or future performance of any PIMCO product.
All investments contain risk and may lose value. Investing in the bond market is subject to risks, including market, interest rate, issuer, credit, inflation risk, and liquidity risk. The
value of most bonds and bond strategies are impacted by changes in interest rates. Bonds and bond strategies with longer durations tend to be more sensitive and volatile than
those with shorter durations; bond prices generally fall as interest rates rise, and the current low interest rate environment increases this risk. Current reductions in bond
counterparty capacity may contribute to decreased market liquidity and increased price volatility. Bond investments may be worth more or less than the original cost when
redeemed. Equities may decline in value due to both real and perceived general market, economic and industry conditions. Annuity guarantees are backed by the claims-paying
ability of the issuing insurance company. PIMCO does not offer insurance guaranteed products or products that offer investments containing both securities and insurance features.
PIMCO does not provide legal or tax advice. Please consult your tax and/or legal counsel for specific tax or legal questions and concerns.
This material contains the opinions of the manager and such opinions are subject to change without notice. This material has been distributed for informational purposes only and
should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. Information contained herein has been obtained from
sources believed to be reliable, but not guaranteed. No part of this material may be reproduced in any form, or referred to in any other publication, without express written
permission. PIMCO is a trademark of Allianz Asset Management of America L.P. in the United States and throughout the world. ©2018, PIMCO.
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
Case 1: Moderate salary/Low savings
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
chooses to take his3 Social Security payment immediately at age 65,
pimco.com
invests 9.4% in a deferred annuity that pays out in 20 years, and
allocates 100% of his assets to equities.4
pimco.com
blog.pimco.com
blog.pimco.com
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.
PC317_60526
The above is based on an abridged version of " Income for the Retirement Years: A New Model for Seeking Stable Retirement Income, " PIMCO In Depth, August 2018.
Past performance is not a guarantee or a reliable indicator of future results.
The analysis contained in this abridged paper is based on hypothetical modeling. No representation is being made that any account, product, or strategy will or is likely to achieve
profits, losses, or results similar to those shown. Hypothetical or simulated performance results have several inherent limitations. Unlike an actual performance record, simulated
results do not represent actual performance and are generally prepared with the benefit of hindsight. There are frequently sharp differences between simulated performance results
and the actual results subsequently achieved by any particular account, product, or strategy. In addition, since trades have not actually been executed, simulated results cannot
account for the impact of certain market risks such as lack of liquidity. There are numerous other factors related to the markets in general or the implementation of any specific
investment strategy, which cannot be fully accounted for in the preparation of simulated results and all of which can adversely affect actual results.
Figures are provided for illustrative purposes and are not indicative of the past or future performance of any PIMCO product.
All investments contain risk and may lose value. Investing in the bond market is subject to risks, including market, interest rate, issuer, credit, inflation risk, and liquidity risk. The
value of most bonds and bond strategies are impacted by changes in interest rates. Bonds and bond strategies with longer durations tend to be more sensitive and volatile than
those with shorter durations; bond prices generally fall as interest rates rise, and the current low interest rate environment increases this risk. Current reductions in bond
counterparty capacity may contribute to decreased market liquidity and increased price volatility. Bond investments may be worth more or less than the original cost when
redeemed. Equities may decline in value due to both real and perceived general market, economic and industry conditions. Annuity guarantees are backed by the claims-paying
ability of the issuing insurance company. PIMCO does not offer insurance guaranteed products or products that offer investments containing both securities and insurance features.
PIMCO does not provide legal or tax advice. Please consult your tax and/or legal counsel for specific tax or legal questions and concerns.
This material contains the opinions of the manager and such opinions are subject to change without notice. This material has been distributed for informational purposes only and
should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. Information contained herein has been obtained from
sources believed to be reliable, but not guaranteed. No part of this material may be reproduced in any form, or referred to in any other publication, without express written
permission. PIMCO is a trademark of Allianz Asset Management of America L.P. in the United States and throughout the world. ©2018, PIMCO.
Principal drawdown
Total income7
-
-
$46,893
$103,000
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.
Case 2: High salary/High savings
Figure 2 shows optimal decisions for a 65-year-old with a savings
PC317_60526
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
3
This corresponds approximately to the median IRA account balance of a 65-69 year-old of $78,612.
Source: EBRI.org as of January 2018
3
This corresponds approximately to the median IRA account balance of a 65-69 year-old of $78,612.
Source: EBRI.org as of January 2018
Figure 1: Case 1 model decision comparison:
$75,000 salary/$75,000 savings
4
We use the pronoun " he " throughout this paper. We do so because our modelling is based on life expectancy assumptions for a typical male, using data from the Social Security
Administration. Because females have slightly longer life expectancy than males, in general this will increase the allocation to a deferred annuity. However, one should not expect
broad differences in results between male and female life expectancy assumptions.
4
We use the pronoun " he " throughout this paper. We do so because our modelling is based on life expectancy assumptions for a typical male, using data from the Social Security
Administration. Because females have slightly longer life expectancy than males, in general this will increase the allocation to a deferred annuity. However, one should not expect
broad differences in results between male and female life expectancy assumptions.
Dollars
% allocation/
decision
The deferred annuity is valued using life expectancy data for a 65-year-old male from the Social Security Administration. We apply a 20% reduction to the " fair " annuity value to reflect
real world pricing of annuities. The haircut we apply is based on Brown, Mitchell, and Poterba (2000), who show a money's-worth range of 0.75 to 0.87 for inflation-indexed annuities.
The deferred annuity is valued using life expectancy data for a 65-year-old male from the Social Security Administration. We apply a 20% reduction to the " fair " annuity value to reflect
real world pricing of annuities. The haircut we apply is based on Brown, Mitchell, and Poterba (2000), who show a money's-worth range of 0.75 to 0.87 for inflation-indexed annuities.
Social Security5
Deferred annuity
5 Denotes annual real Social Security income. Denotes annual real Social Security income.
5
6 ASSET ALLOCATION
Stock/bond allocation is shown as a percentage of the non-annuitized assets. Retirement income is determined by multiplying the average nominal stock and bond balance over
the next 20 years by the estimated real returns of 2.7% and 0.8%, for equities and fixed income, respectively.
Stock/bond allocation is shown as a percentage of the non-annuitized assets. Retirement income is determined by multiplying the average nominal stock and bond balance over
the next 20 years by the estimated real returns of 2.7% and 0.8%, for equities and fixed income, respectively.
Stocks6
Bonds
7 Income is expressed in real (inflation-adjusted) dollars. Percentage expressed as a fraction of starting wealth.
7 Income is expressed in real (inflation-adjusted) dollars. Percentage expressed as a fraction of starting wealth.
Total income7
Principal drawdown
100.0%
0.0%
2.0%
-
8 Denotes annual real Social Security income. Average income reflects the fact that no Social Security payment is received during the first five years.
9 $385,000 corresponds approximately to the mean retirement account balance. Source: EBRI Brief, March 13, 2018, No. 445.
$67,950
$0
-
-
8 Denotes annual real Social Security income. Average income reflects the fact that no Social Security payment is received during the first five years.
9 $385,000 corresponds approximately to the mean retirement account balance. Source: EBRI Brief, March 13, 2018, No. 445.
Figure 2: Case 2 model decision comparison:
$200,000 salary/$2 million savings
% of
Dollars
allocation/
decision
Social Security8
Deferred annuity
Stocks6
Bonds
Defer
3.2%
33.7%
66.3%
2.3%
allocated at
retirement
-
$64,000
$652,432
$1,283,568
-
$1,523
$0
$1,477
$27,500
Immediate
9.4%
-
$7,050
$24,500
-
allocated at
retirement
Real income
first 20 years
DEFERRED ANNUITIES
2
Absent this constraint, retirees fully spend down their savings and rely on income from the annuity for their remaining life in our model. In reality, very few retirees would be willing
to be so profligate. As such, we constrain agents to hold a positive wealth balance.
Real annual
income first
20 years
$32,400
-
$14,989
$8,718
CMR2018-0924-355819
CMR2018-0924-355819

http://www.EBRI.org http://www.plansponsordigital.com/plansponsor/october-november_2018/TrackLink.action?pageName=21&exitLink=http%3A%2F%2FEBRI.org http://www.pimco.com http://www.plansponsordigital.com/plansponsor/october-november_2018/TrackLink.action?pageName=21&exitLink=http%3A%2F%2Fpimco.com http://blog.pimco.com http://www.plansponsordigital.com/plansponsor/october-november_2018/TrackLink.action?pageName=21&exitLink=http%3A%2F%2Fblog.pimco.com

PLANSPONSOR - October/November 2018

Table of Contents for the Digital Edition of PLANSPONSOR - October/November 2018