Page 15 - Investment Advisor - December 2023

ment goes 36 years and that their portfo- signal that they could expect to spend similar way. “When selecting an optimal
lio in the simulation would cover just 30 more annually early in retirement — retirement strategy, a retiree may aim
years, that would give them a ratio of 1.2. especially if they don’t have big legacy to maximize the coverage ratio, a novel
Obviously, the more this ratio increas- giving goals. metric superior to the failure rate,” he
es, the more cautious a client would wrote. “This article suggests focusing on
want to be about that plan and the BottoM lIne the whole distribution of coverage ratios
more they may need to consider mak- Estrada argues that advisors and clients instead, or at least on some percentiles that
ing lifestyle adjustments along the way can use this framework to help make may be of particular interest to a retiree.”
to protect themselves from running ongoing adjustments according to the Although such an approach may
out, Hopkins said. The idea is that, as perceived likelihood of these different not be as neat as making decisions
one navigates retirement, they will see events occurring. “Now remember, you based on optimizing a single vari-
their coverage ratio move up and down should pick a strategy not based just off able, it does enable consideration of
according to their actual spending, mar- of this research but one that resonates the relevant trade-offs a retiree needs
ket conditions and other factors. with you and that you can understand,” to evaluate in order to find an ideal
Alternatively, if clients assume a Hopkins said. “You should also not retirement strategy.
24-year retirement period and their get too overly focused on one number.
portfolio could easily sustain 30 years Remember, success isn’t binary and nei- John Manganaro is a senior retirement
of withdrawals, that gives them a start- ther is your retirement.” reporter and can be reached at
ing coverage ratio of 0.8, which may Estrada summarizes his findings in a [email protected].

net-worth client segments, given their excess relative longevity vative, longer-term bond funds with no reinvestment or inter-
compared with the u.S. population as a whole. est rate risk. this example is approximately a 6% internal rate
“Advisors will know that the worry about outliving one’s of return starting at age 88, and it climbs thereafter — con-
money comes up often,” he says. “but you might be surprised tractually guaranteed by the insurance company.”
to know that it comes up frequently even among the higher- beyond the potential for an early death, Opiela says, the
net-worth clients we serve. It’s just a natural fear — that lon- other primary drawback of a QLAc is losing liquidity. In this
gevity risk and the basic fear of outliving one’s money.” sense, it is a great solution for the mass affluent, he says,
As Opiela explains, the idea of hedging longevity risk is an because this group will likely have enough liquid assets to
important component of the planning discussion when it comes address the early phase of retirement but may face a tougher
to QLAcs, but that’s not the whole story. Especially with rates picture if they end up living beyond 90 or even 100.
where they are today, the QLAc can also be an attractive “If someone is worried about passing away before they get
approach from an internal rate of return perspective. income from the annuity, there are products out there with a
Opiela shares the theoretical example of a healthy man who cash refund option,” Opiela explains. “Depending on the cli-
is 63 and thinking about funding a QLAc. “Let’s imagine that ent’s concerns, you can incorporate this concept. but keep in
he transfers $200,000 in qualified money into a QLAc that mind, there is a cost.”
begins to pay out at his age 80,” Opiela suggests. citing the prior example of the healthy 63-year-old man
“With rates where they are today, at age 80, he could buying a QLAc that starts paying income at 80, the use of
expect to receive around $74,000 annually in guaranteed a cash refund option would decrease his $74,000 a year in
lifetime income. If he lives to age 88 in this scenario, the guaranteed income by a little more than $10,000. “there is a
income translates to a 6% internal rate of return on the dollars tradeoff,” he says. “Still, I like to see that the products are get-
deployed to the QLAc, and that number only goes up over ting more flexible in this regard, and I see this as an important
time,” he explains. option for advisors to know.
Opiela stresses the importance of health considerations in “the important planning point here is that today, the
this planning discussion. Simply put, this may not be a great future income solves may be higher in QLAcs, but we should
strategy for a client with health issues and/or doubts about liv- acknowledge that fixed indexed annuities have other poten-
ing long enough to reclaim their initial investment. tially attractive elements to them as well,” Opiela concludes.
“but, as you can see, if someone is healthy now and they “those will give you some additional liquidity and flexibility,
are worried about outliving their funds, this is a great, simple but likely are not going to beat the guaranteed income from
option,” he says. “One may obtain a higher return than conser- the QLAc.” — John Manganaro

December 2023 Investment AdvIsor 13