Reprinted with permission by the Financial Planning Association, Journal of Financial Planning, December 2001, John Ameriks, Robert Veres, Mark J. Warshawsky, Making Retirement Income Last a Lifetime
Professional retirement planning advice relies to a great extent on the determination of how much retirement income can be provided by systematic withdrawals from an investment portfolio. Because future investment returns, inflation rates, and how long a retiree will live are unknown, one cannot know, with certainty, how much income a retirement portfolio can ultimately provide. Recent research has incorporated uncertainty regarding investment returns and inflation in estimating maximum safe portfolio withdrawal rates. However, uncertainty regarding length of life has not been fully considered. The goal of this article is to explore the sustainability of investment portfolio withdrawals using two distinct methodologies&en;historical analysis and Monte Carlo simulations&en;to address the risk of extreme longevity. The article also examines whether annuitizing a portion of client assets makes it more likely that retirees can enjoy higher incomes over longer retirements. The results of the analysis may lead financial advisors to reconsider recommendations regarding the structure of their clients' investment portfolios in retirement.
Click here for a summary article on this research study entitled "Can Investors Make Retirement Income Last a Lifetime?" This appeared in the Winter 2002 issue of Quarterly, a TIAA-CREF Institute publication.
