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Annuities with Mutual Funds Give the Best of Both Worlds


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In “It’s Spee-Ahz, By a Nose!” from the Retirement Income Journal, Kerry Pechter summarizes a detailed study stating the best strategy for retirement is a combination of income annuities and mutual funds.  Mark J. Warshawsky, a former U.S. Treasury official, and Gaobo Pang, a former World Bank economist, are both consultants with Watson Wyatt Worldwide.  In order to both generate an income and leave money to ones heirs, their study recommends putting 25% of your savings into an annuity when you are ready to retire.  Many income-phase experts also recommend combining the two retirement strategies.  Even though many firms offer this kind of retirement plan and it makes sense since mutual funds maximize returns while annuities maximize income, it has not become widely popular or successful yet.

In the study “Comparing Strategies for Retirement Wealth Management: Mutual Funds and Annuities,” Warshawsky and Pang studied six ways to invest $1 million at age 65.  They ran the strategies through Monte Carlo simulations using thousands of scenarios, many different fee and asset allocation combinations, and the assumption that all investors lived to be 100 years old.  Their results showed that the SWiP strategy would have the greatest wealth at age 100, but potentially the lowest yearly payouts.  All of the annuity only options gave a higher annual income but had little value at age 100.  The two strategies that mixed mutual funds with annuities were in the middle of those extremes.  The highest income level and likely long term wealth was with the mutual fund/SPIA hybrid.  Their motivation for the study was finding a way for defined contribution plan participants to create retirement income from their savings.

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