Selecting the financial products that will give your retired clients the income they need without excessive risk is always a challenge. Each product has its advocates and critics, and analyzing their impact on retired clients’ finances can be complex.
In this regard, a recent article in the “Journal of Financial Planning” (Comparing Strategies for Retirement Wealth Management: Mutual Funds and Annuities) by Gaobo Pang, Ph.D., a senior economist at Watson Wyatt Worldwide and Mark J. Warshawsky, Ph.D., director of retirement research at Watson Wyatt Worldwide, helps clarify the issue.
The 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:
(1) 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.
The summary notes:
- Systematic withdrawals from mutual funds usually give opportunities for greater wealth creation at the risk of large investment losses and income shortfalls.