Single-Life Income Annuity Part of Pfau’s Retirement Strategy

American Pharoah isn’t the only one out there with a triple crown.  While the horse certainly holds the big title in the sports industry, Wade Pfau says that he has found the triple crown of retirement income strategies.  Robert Bloink and William H. Byrnes wrote about Pfau’s findings for Think Advisor in the article, “Annuities, Insurance, Investments: A Triple Crown Retirement Income Strategy.”  It can be really confusing to create a retirement income strategy because there are so many options.  There just might be a winning strategy that can help you get the most out of your retirement savings.  Pfau’s recent study looked at a combination of annuity products, life insurance and more traditional retirement accounts.  The top strategy, according to Pfau, provides retirees with secure retirement income and offers important options at different stages of retirement.

The research used information for a 35-year old married couple who had $65,000 in 401k retirement savings and $15,000 to invest each year.  It looked at different market conditions as well as different retirement income products before coming to the final conclusion.  Pfau says that this couple would maximize their retirement income strategy using a 401k, a single-life income annuity and whole life insurance.  The couple’s retirement income increased by 40% when the single-life annuity was added into the equation.  A 50-year old couple with $625,000 in 401k savings and $32,000 to invest annually would see a 45% increase in retirement income using this triple crown strategy.  The amount of legacy wealth increased significantly over time for both couples as well.

This triple crown retirement income strategy helps to greatly mitigate both longevity risk and sequence of returns risk.  By using a single life income annuity product, the couple gets much higher payout rates than they would if they purchased a joint and survivor annuity.  It makes sense to use a single life annuity product in combination with whole life insurance, so that the surviving spouse will still receive money when the first spouse dies.  They can use that money to purchase their own single life annuity product, or keep it as a life insurance policy to leave to their heirs upon death if they still have 401k savings to use for income.  Sequence of returns risk is prevalent when only a 401k income strategy is used.  If markets are low during the beginning of your retirement, your overall returns will be much lower than if you had to deal with low markets during the end of your retirement.  Since there is no way to know what kind of market volatility will occur, having an annuity and life insurance helps to manage that sequence of returns risk.  The portion of your money that is moved into an annuity will not only be removed from market fluctuations, it also guarantees a certain level of retirement income.

It’s certainly important to diversify your retirement portfolio because each type of product has its own unique benefits.  Wade Pfau’s research found that whole life insurance adds flexibility to a retirement income strategy with an annuity a traditional retirement account.  His triple crown retirement income strategy uses a single life income annuity, whole life insurance and a 401k-type retirement plan to efficiently plan for retirement.

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