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RETAIL LONGEVITY/DECUMULATION – RETIREMENT PRODUCTS AND STRATEGIESMark J. Warshawsky, Ph.D.,

ReLIAS LLC

59th Annual Canadian Reinsurance Conference, Toronto, Ontario

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AGENDA

•Market•Needs of Retired Households•Retail Products• Income and Asset Strategies•Empirical Analysis

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MARKET (Canada, Macro)

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MARKET (US, Micro)

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NEEDS OF RETIRED HOUSEHOLDS

• Putting aside those well covered by social and/or employer pensions and those with very high net worths….

• Retired households need a plan that accounts for • Uncertainty about longevity• Risky asset returns (including real estate) and interest rates• Uncertain inflation, general and specific• Uncertain uninsured expenses, especially long-term care• Need or desire for inter vivos transfers• Dynamic and likely declining cognitive abilities• Bequests• Current and possibly different future tax policy• Different and personal attitudes toward risk, future spending, liquidity,

and legacies.• Different and personal expectations of health and future employment,

and demographic and asset holdings.

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RETAIL RETIREMENT PRODUCTS• SPIAs

• Deals well with risks of longevity, declining cognitive abilities, and downside asset returns – produces high income for life

• Deals poorly with timing risk, inflation, liquidity, and bequests

• Inflation-indexed SPIAs• Covers inflation risk well• Higher load; thin market

• DIAs• Only part of a strategy• Higher load; relatively thin market

• Variable annuity with GMWB (or similar wrappers)• Solves liquidity and timing risk problems well, bequests not so well• Complex, somewhat constrained, and seems quite expensive

• Personal Endowment• Solves liquidity and bequest problems well• No guarantees; produces relatively low income; governance?

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INCOME AND ASSET STRATEGIES• The “Bengen Rule”

• 4% inflation-adjusted distribution from a mixed asset portfolio• Financial advisors’ workhorse; also investment companies’• Recent concerns that it is too aggressive and risky, given low

interest rates, high stock market, and increased lifespans• 3% distribution or even less may be more appropriate

• Fixed or increasing percentage distribution• Laddered purchases of SPIAs

• Dollar cost averaging – deals well with timing and inflation risks• Can provide for liquidity and bequest needs, in combination with

other strategies; also somewhat flexible

EMPIRICAL ANALYSIS – HISTORICAL SIMULATIONS (1919 – 2013)

Simple Comparison For All Cohorts of Annual Real Income Flows (to age 110) between Bengen Rule and J&50%S Life Annuity

Retirement Age

Number of Cohorts Bengen Rule Has Higher Average Income

Number with Higher Weighted Average Income

Total Number of Complete Cohorts

Mean Average Value of Difference

Mean Weighted Average Value of Difference

55 30 26 40 $720 -$38

62 25 9 47 -$55 -$1,007

65 23 2 50 -$480 -$1,549

67 20 0 52 -$794 -$1,979

70 8 0 55 -$1,302 -$2,708

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EMPIRICAL ANALYIS – HISTORICAL SIMULATIONSMeans of Inflation-Adjusted Annual Income Produced by A Combination Strategy from a $100,000 Retirement Account, Historical Simulations of Cohorts Retiring at Age 70 from 1919 through 1983, in the First, Tenth, Twentieth and Thirtieth Years After Retirement

Combination Strategy Combo

Total Fund Annuity Fund Less

Payment Balance Payment Payment Annuity Only

Year 1 $4,191 $84,485 $1,248 $2,943 -$4,448

Year 10 $4,688 $96,777 $1,318 $3,370 -$2,126

Year 20 $5,145 $112,892 $1,194 $3,951 $256

Year 30 $5,117 $122,789 $819 $4,298 $1,783

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Mark.Warshawsky@reliasllc.com