Decumulation of retirement savings—the conversion of those assets into a lifetime income stream—can be at once both the solution most needed and the challenge least easily solved. Nearly 60% of individual investors with financial professionals, and 80% of those without a financial professional, lack a retirement income plan (Cerulli, 2020). The absence of a carefully engineered process for generating sustainable income arises from a scarcity of clear, objective, and easily implemented methods for achieving that goal. This paper offers a potential solution to the income replacement puzzle. Specifically, we conclude the following: 

  • A classic rule of thumb known as the 4% withdrawal rule may no longer be viable due to longer life expectancies and potentially lower returns in both stock and bond markets. A more robust approach to retirement planning and an expanded menu of investment products may need to be considered.
  • Annuities are generally an underutilized tool that can help investors achieve their basic retirement goals by managing the risk of outliving their assets as well as hedging the risk of negative returns early in the withdrawal period. 
  • Properly pairing traditional stock and bond investment options with an income annuity can potentially yield better retirement outcomes.
  •  The appendix of this paper also explores a specific framework and methods for evaluating common trade-offs such as retirement income, timing, and bequests. 

The information presented is for informational purposes only and sets forth our views as of this date. The framework for retirement investing was informed by academic research from Estrada and Krinzman, and the New York Life Annuities team. These ideas are described in this whitepaper and modeled using a proprietary utility framework. For explanatory purposes the framework leverages historical returns sourced from Bloomberg in risk return modeling where noted. These assumptions are further described in Appendix B. Including annuity estimates for year 1983, when no historical pricing was available.These estimates were based on the relationship between AAA bonds and annuity yields after 2006. An investor cannot invest in an index.

The comments, opinions, and estimates contained herein are based on and/or derived from publicly available information from sources that we believe to be reliable. We do not guarantee the accuracy of such sources or information. The underlying assumptions and our views are subject to change. This does not constitute a specific investment or insurance product recommendation and should not be used as a basis for any decision. Rather, an assessment should be made as to whether the information is appropriate in individual circumstances and consideration should be given to talking to a financial professional before making any decision.

“New York Life Investments” is both a service mark, and the common trade name, of certain investment advisors affiliated with New York Life Insurance Company.

New York Life Insurance and Annuity Corporation, a subsidiary of New York Life Insurance Company, offers the types of annuities referenced in this whitepaper