What Stanford University Learned about Using Fixed Index Annuities to Create Retirement Income

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Written by Hersh Stern Updated Sunday, November 19, 2017

As retirement approaches, two of your biggest concerns are how much income you will be able to produce from your accumulated assets and will that income last for your lifetime.

A recent study by the Stanford Center on Longevity and the Society of Actuaries discovered that one of the most important considerations affecting a retiree’s income is the investment vehicle chosen at retirement.

The report analyzed three different systematic withdrawal scenarios, including:

  • The 4% Rule- Retirees withdrawal 4% from their retirement assets annually, adjusting based upon fluctuations in the Consumer Price Index (CPI) for the duration of their lifetime, or until their assets have been depleted.
  • Modified 4% Rule- At the beginning of each fiscal year, retirees withdrawal 4% of their assets. This figure will increase or decrease based upon the previous year’s market performance and its impact on the invested assets.
  • RMDs- The annual income produced in this scenario is equivalent to the IRS mandated required minimum distribution (RMD) rule which applies to qualified plans once an individual achieves the age of 70 ½. From age 65 to 70 1/2 , the amount withdrawn was 3 ½ percent of their retirement assets at the beginning of each calendar year.

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Great AmericanAmerican Legend III 5.40% N/A 7
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SymetraSymetra Edge Pro 7 5.00% N/A 7
ProtectiveProtective Indexed Annuity II 7 4.60% N/A 7
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In addition to reviewing the results from each of the above withdrawal strategies, the report also considered three different annuity contracts, each offering lifetime income to the contract owners. The annuities considered included:

  • Single Premium Immediate Annuity (SPIA) which produced a level (unchanging) income amount for life based on the premium paid;
  • Single Premium Immediate Annuity (SPIA) where the income amount for life was adjusted based on changes in the Consumer Price Index (CPI)
  • Fixed Index Annuities that offered an income rider also known as a guaranteed lifetime withdrawal benefit (GLWB)

The report used Monte Carlo simulations to project retirement outcomes based upon a number of potential economic variations. What the report showed is that the amount of retirement income produced by these strategies can vary significantly.

The results from the report can be summarized as follows:

  • The initial income produced from the listed strategies varied from $3,500 to $5,490, with the highest amount provided by the level (non-CPI) immediate annuity (SPIA).
  • The income produced after 15 years ranged from $2,918 to $4,158, with the highest value also being attributed to the level (non-CPI) immediate annuity (SPIA).
  • The income produced after 30 years ranged from $2,092 to $4,000, with the highest value being attributed to the systematic withdrawal method utilizing the modified 4% rule.
  • Level income immediate annuities and fixed index annuities provided the highest initial income amounts, but decreased over time due to the impact of inflation. After 15-20 years, inflation-adjusted immediate annuities and systematic withdrawal methods (modified 4% rule and RMD) produced the greatest amounts of lifetime income.

Each of the scenarios described above utilized inflation adjusted figures. As you can see, the income produced during retirement years depends tremendously on the vehicles selected and the strategies utilized for withdrawals.

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Society of Actuaries

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