Retirement income for life

By Robert Powell, MarketWatch

BOSTON (MarketWatch) — There was a time when a retiree didn’t need to worry about balancing the need to leave an inheritance with the need to have guaranteed income for life with the need to enjoy a decent standard of living.

That’s not the case anymore. Now those on the cusp of retirement and those already living in retirement need a better mousetrap. Today, they need to look beyond their traditional mix of stocks and bonds to building a portfolio that consists of all their sources of capital.

What’s more, they may need to incorporate some of those not-so-well-understood products, such as longevity insurance or single-premium immediate annuities or variable annuities with guarantees, into their portfolios. Or at least, they should if they want to be prudent.

Now, we’ve written about this in the past, when it was part theory and part test model. But now the concept of constructing a portfolio designed to accomplish multiple goals, including not outliving your assets, is more of a reality. There are companies building and selling software designed to help you manage and allocate your capital in ways that take into account what are often conflicting goals. There’s an endless amount of new research on the subject. There are even new self-help books.

So what’s the latest thinking on how to integrate all these new products into your portfolio? Here’s what experts had to say.

Retirement risks

For starters, you can’t build a retirement-income portfolio without taking into account all the risks that retirees face in managing their investments, according to Michael Henkel, a managing director of Envestnet PMC, which sells a retirement-income software program to firms in the financial services industry.

Those include longevity, the risk of living longer than expected and running out of assets; inflation, the risk that you lose purchasing power over time; sequence of returns, the risk of experiencing (as many did in 2001 and 2008) bad market returns early in retirement and suffering losses from which it’s difficult to recover; and volatility of returns, the risk that is typically associated with investing in stocks and bonds.

Many products, similar objectives

The next order of business is to get a sense of the universe of retirement-income products that you can use to address those and other risks.

There are at least nine broad categories focusing on retirement income, according to Ernst & Young. Those include target-date funds, life insurance, variable annuities, fixed annuities, long-term-care insurance, payout funds, fixed index annuities, combination products (annuities plus long-term-care insurance, or life insurance plus long-term care), and payout annuities.

To Henkel, there are four large groups: systematic withdrawal, which is what most retirees use today; single-premium immediate annuity; variable annuity with guaranteed lifetime withdrawal benefits; and single-premium immediate variable annuity.

But no matter how many retirement-income products there are, a few things are certain. Henkel said these products all have their strengths and weakness and none are silver bullets; none of them completely address all retirement risks. “There is no one-size-fits-all solution,” Henkel said.

What’s more, some of these retirement-income products might accomplish similar goals, but work very differently. For instance, payout funds — mutual funds designed to pay out a certain amount of income to retirees (the Vanguard Payout Funds and the Pimco Real Income Funds) — are similar in some ways to payout annuities. They are, however, very different in other ways, including the fact that annuities are more expensive than mutual funds, while payout funds have no guarantees but annuities do.

Which retirement-income product you add to your portfolio might depend more on the adviser you’re working with and what regulatory body oversees that person (state insurance departments, FINRA, or SEC) and what business model they use (fee, or fee-plus-commission, or commission only) than anything else.

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