Comparing Strategies for Retirement Wealth Management: Mutual Funds and Annuities

Pang, Gaobo; Warshawsky, Mark J.
August 2009
Journal of Financial Planning;Aug2009, Vol. 22 Issue 8, p36
Academic Journal
This article compares wealth management strategies for individuals in retirement, focusing on trade-offs regarding wealth creation and income security. Specifically, it compares the following six strategies: (I) systematic withdrawal from mutual funds, (2) fixed payout immediate life annuity, (3) immediate variable annuity for life, (4) variable annuity plus guaranteed minimum withdrawal benefit (VA+GMWB), (5) mix of withdrawals from mutual funds and fixed payout immediate life annuity, one-time wealth split at retirement, and (6) mix of mutual fund withdrawals and fixed payout life annuity gradual annuitization at certain ages. Systematic withdrawals from mutual funds usually give opportunities for greater wealth creation at the risk of large investment losses and income shortfalls. Fixed and variable life annuities forgo bequest considerations and distribute the highest incomes. A variable annuity with guaranteed minimum withdrawal benefit (VA+GMWB) somewhat addresses both income need and wealth preservation. Mixes of mutual funds and fixed life annuities deliver solutions broadly similar to, and even more flexible than, a VA+GMWB strategy. Defined contribution plan participants should be aware of contract terms, because fees and charges play a non- trivial role in altering wealth creation and income levels. In-plan institutional pricing of funds may provide better opportunities than lump sum purchase on retail terms. None of the strategies obviously dominates, so the best advice may be to segment wealth to establish minimum necessary consumption and hedge against longevity risk, then focus on growth opportunities. Investors should also optimize portfolios to account for benefits from defined benefit plans and Social Security.


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