A change in deferred annuity prices will have a similar effect on the likelihood that a high-income or low-income male worker will achieve an adequate retirement income, according to Youngkyun Park.

Park, a researcher at the Employee Benefit Research Institute (EBRI), Washington, has written about the effects of changes in deferred annuity prices on income adequacy in a note distributed by EBRI.

Park looked at the possible effects of annuity prices on whether a male who is Retirement clockretiring at age 65 will have a 90% chance of having an adequate retirement income.

Park did not look at the effects of annuity prices on women, or on men retiring at different ages, but, when conducting simulations, he did consider factors such as general and long term care inflation rates, post-retirement health care cost estimates, anticipated annuity income, anticipated Social Security benefits, and post-retirement investment income.

Park calculated the multiple of final annual earnings needed for the 65-year-old male to have a 90%.chance of having adequate retirement income, if the male puts a specified percentage of assets in stocks and annuitizes a specified level of assets.

Under the baseline price assumptions, a man with final earnings of $16,932 who puts only 5% of assets in stocks would have to start with an amount equal to 33.3 times earnings to have a 90% chance of generating adequate retirement income.

If the price of the annuity were 19.1% higher, the man would have to have an amount equal to 35.7% of final earnings to have a 90% chance of having enough retirement income.

Similarly, if the same man put 95% of assets in stocks, he would have to start with an amount equal to 30.8 times earnings; the amount would increase to 32.27 times earnings if the price were 19.1% higher.

If the man were earning $103,584 per year and put 5% of assets in stocks, he would need to start with an amount equal 5.34 times earnings under the baseline assumptions and 5.72 times earnings if the price of the annuity were 19.1% higher.

If the high-income man put 95% of assets in stocks, he would need 4.91 times earnings with the baseline annuity price and 5.15 times earnings if the price were 19.1% higher.

“Te results in the lowest-income category are very similar to those in the highest-income category, except for the scale of a multiple of final earnings,” Park concludes.

- Allison Bell

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