The market’s volatility has reinforced the need for diversification among income sources in retired clients’ portfolios, and a recent study, “Four Strategies for Retiring Clients,” by Noelle E. Fox and Drew A. Denning of the Principal Financial Group’s Retiree Services Group can help with this reinforcement by illustrating the risk-return tradeoff.
The authors examine the use of four distinct strategies designed to generate retirement income: mutual funds with automated income payments (both endowment style and self-liquidating); variable annuities with guaranteed minimum withdrawal benefits; income annuities; and combinations of mutual funds and income annuities. The study focused on the pros and cons of each approach, including:
Access to account balance
Inflation risk, and
The researchers used Monte Carlo analysis with the same set of assumptions for each strategy to avoid biasing the outcome. The investor was assumed to be age 65 with $500,000 in 401(k) savings. Inflation was held at a flat rate of 3 percent, inflation was held at a steady annual rate of 3 percent, and the initial income withdrawal rate was 5 percent.