Some people pit toy soldiers against one another.
Others program computers to play chess with themselves.
Wade Pfau — a professor of practice at the American College of Financial Services and the holder of a doctorate in economics from Princeton — sends annuities into the Monte Carlo investment scenario arena against various other types of retirement portfolios, such as portfolios consisting of 60% of stock and 40% of bonds.
He then watches the nest egg shells fly and records the results.
Equitable has sponsored Pfau's latest annuity modeling exercise: a comparison of the retirement planning success of a woman who puts 30% of her $100,000 in investable wealth in a variable annuity and the rest in a bare investment portfolio with an otherwise identical woman who simply allocates a mix of her $100,000 to stocks and bonds.
The results: Pfau found that putting 30% of assets in a variable annuity worked best for a woman who retired between ages 60 and 70 and began taking income immediately and for a woman who waited 10 years to begin taking income from her annuity and retired between age 60 and 75.
What it means: The variable annuity-enriched portfolio outperformed the traditional bare portfolio in a large percentage of the 2,000 Monte Carlo simulations performed.
The history: The new white paper is part of a series of annuity performance analysis white papers Pfau has produced.
A year ago, for example, he showed that owning registered index-linked annuities could be a much stronger portfolio stabilizer than bonds.
He also has written about the performance of products such as fixed indexed annuities.
The methods: Pfau tied the variable annuity allocation's hands behind its back. He assumed that both portfolios were held inside tax-deferred retirement accounts. By doing that, he avoided letting the portfolio with the variable annuity allocation benefit from annuities' ability to help the owner defer income taxes on the asset growth.
He did not consider insurer default risk. He defined success by looking at the probability that a portfolio could support a specified level of withdrawals until a given age.
Results details: For a hypothetical woman who began taking retirement income equal to 5% or more of assets immediately, the predicted odds of success were bad for most retirement starting ages and lifespan combinations.
If the woman retired around age 60 or earlier, began using a 7% withdrawal immediately, and lived past 85, she had a 0% chance of success if she relied completely on a traditional investment portfolio.
With a variable annuity allocation, she could scrape up odds of success of 30% or higher only if she died at 85. If she lived to 90, she'd be out of luck.
Owning an annuity had the biggest impact on success, with a reasonably high level of success, if she waited until she was 65 to retire, picked a withdrawal rate of 4% and lived to age 90 or older. If she died at 90, for example, owning a variable annuity increased her odds of success to 72%, from 65%.
For a hypothetical woman who had the benefit of a 10-year deferral of withdrawals, the predicted odds of success were much higher, and the impact of owning the variable annuity was bigger.
Her odds of success could be over 50% even if she retired at 65 and chose a 5% withdrawal rate. With that combination, owning a variable annuity would increase her odds of success to 55%, from 45%, if she allocated 30% of assets to an annuity.
If she lived to age 65, the annuity would increase her odds of success to 39%, from 29%.
If that same woman waited until she was 70 to retire and lived until she was 95, owning the variable annuity would increase her odds of success to 56%, from 45%.
The future: Pfau said in an interview that he's also keenly interested in showing what happens when retirement savers put their bonds inside investment-only variable annuities, with a boost from tax deferral, rather than leaving the bonds bare.
"These are tax-inefficient assets," he said.
Peter Golden, an Equitable executive, said that annuity white papers have always been popular with Equitable advisors, and that volatility has increased clients' interest in knowing more about annuities. "They're definitely asking questions about downside protection," he said.
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