‘Hybrid’ Income Strategy Best for Retirement

Research from TIAA Institute suggests the insurance value of a GLWB may be overstated relative to the typical cost of purchasing the GLWB guarantee, and a systematic withdrawal strategy is too risky for retirees.

Further supporting the advice, “Don’t put all your eggs in one basket,” research from TIAA Institute suggests a hybrid income strategy produces the best outcome for retirees.

The research used historical monthly returns data to analyze and compare three different retirement income strategies:

  • A guaranteed lifetime withdrawal benefit (GLWB) product strategy designed to provide a guaranteed minimum amount of lifetime income, asset liquidity, and the potential for receiving additional income from portfolio gains;
  • A hybrid income strategy, combining a variable immediate annuity (VIA) with discretionary supplemental withdrawals from a separate liquid asset account, which protects against longevity risk, provides limited asset liquidity, and offers the potential to receive additional income from portfolio gains; and
  • A simple systematic withdrawal strategy where the retiree bears all retirement related risks.

According to the Institute’s report about its study, its analysis indicates that the insurance value of a GLWB may be overstated relative to the typical cost of purchasing the GLWB guarantee. Using historical asset return and inflation data over the past 90 years, the Institute found most cohorts of retirees would have achieved similar or better outcomes by simply avoiding annual GLWB fees. Compared to a systematic withdrawal strategy, most cohorts of retirees would have received the same level of annual income, had greater liquidity, and left a larger estate relative to purchasing GLWB protection. However, retirees using the systematic withdrawal strategy would have borne substantial retirement risks.

The study report says, “If a partial VIA strategy was utilized as part of an alternative income strategy, then most cohorts of retirees would have had guaranteed lifetime income protection, limited but increasingly greater liquidity and potential estate, and had better inflation protection relative to a comparable GLWB strategy.” However, the provider notes that early in retirement, the VIA strategy would provide relatively less liquidity for covering unexpected or catastrophic expenses. 

“Overall, we conclude that a hybrid income strategy comprised of a VIA and supplemental liquid asset account would have provided the best mixture of income generation and risk management for the majority of cohorts. This is particularly true for cohorts starting income after 1980,” the paper says. However, TIAA Institute concedes that it did not address the fact that a GLWB can be purchased before retirement to allow for a lock-in of a minimum income floor, with liquidity and potential upside. In addition, it did not run stochastic (Monte Carlo) simulations, but used actual past historical return performance in running simulations. And it did not address the possibility of lump-sum draw-downs to finance emergency needs during retirement and the impact of these cash withdrawals on future income.

The research report is here.