A medium-soft annuity cushion might create the best stream of retirement income.
Wade Pfau, an economist who once served as director of the Retirement Income Certified Professional designation program, makes that case in a new analysis prepared with support from Equitable.
Pfau looked at the performance of hypothetical portfolios for a hypothetical 65-year-old who was just starting to plan for retirement and for a 60-year-old who was preparing to retire at age 60.
Some of the portfolios included registered index-linked annuities with guaranteed lifetime withdrawal benefits, or contracts that provided some cushioning against investment market ups and downs during the retirement saving stage of life and a fixed income after age 65.
Pfau found that the middle, RILA way was much more likely to meet the clients' income goals than either portfolios with no annuity cushioning; portfolios with thick, non-variable annuity cushioning; or portfolios with traditional variable annuity padding. And, from Pfau's perspective, the RILA way worked much better than filling a portfolio with bare bonds.
Bonds "do not serve a useful role for meeting spending goals in the optimal retirement income portfolio," he writes in the paper. "Any allocation that shifts from bonds to the annuity will improve the efficient frontier outcomes."
What it means: If Pfau is correct, then clients who want to maximize retirement income should consider using RILA contracts in place of bonds.
Wade Pfau: Pfau earned a bachelor's degree in economics from the University of Iowa and a doctorate in economics from Princeton, where his advisor was Alan Blinder, an economist who had served as vice chair of the Federal Reserve board shortly before Pfau met him.
Pfau later taught at the National Graduate Institute for Policy Studies in Tokyo before returning to the United States to become a professor of retirement income at the American College of Financial Services.
He ran the RICP program from 2019 through 2023 and is now a professor of practice at the school.
He is also director of retirement research at McLean Asset Management, the founder of Retirement Researcher and the founder of RISA, an organization that is developing retirement saver assessment tools.
The research: Pfau has been adapting tools from economists' modern portfolio theory framework, which focuses on maximizing investment returns, to analyze efforts to achieve other, retirement-related goals, such as ensuring that retirement savers will have a minimum amount of income throughout retirement.
His new paper is part of a body of work that includes a general analysis of use of annuities in retirement income planning and analyses of the impact of income annuities, variable annuities and non-variable indexed annuities on retirement planning.
He also has written about annuities as an asset class in their own right and, last fall, use of RILA contracts while a worker is saving for retirement and building up assets.
The new paper, which focuses on pulling income from a nest egg, is a sequel to the earlier RILA paper.
