Anchoring spending in choppy waters: The impact of guaranteed income

Maximizing spending, addressing longevity

Guaranteed income is a powerful tool that can allow retirees to consistently spend in retirement. We explored the benefits of incorporating guaranteed income into retirement portfolios, specifically comparing traditional target-date funds with those that include an embedded option for guaranteed income.

We believe successful decumulation strategies should consider, and seek to address, all three of our decumulation principles: 1) maximize spending, 2) maximize spending certainty and 3) address longevity risk.

Our previous research has demonstrated the value of guaranteed income in portfolios. From earlier published works (“Paving the Way to Optimized Retirement Income,” 2023, “When Nest Eggs Need a Safety Net”, 2024), we know guaranteed income can boost spending, so we now seek to understand how this proof-point holds up across a sample of market environments.

The purpose of this paper is not to advocate for timing the market to purchase guaranteed income. Rather, we seek to demonstrate the range of outcomes an investor might expect across various market environments with and without the presence of guaranteed income.

About the research

For this analysis, we ran a series of simulations for two portfolios – one traditional strategy invested in stocks and bonds, the other invested in stocks, bonds, and a guaranteed income strategy.

We leveraged our proprietary lifecycle model and reflected various economic conditions, including historic scenarios, interest rate shocks, high growth market environments, and assumed a 30% allocation to the annuity at retirement for the guaranteed income strategy.

Why it matters

When it comes to investment design, it is our view that optimal spending strategies both 1) keep costs at parity with traditional defined contribution offerings; and 2) keep the opportunity for guaranteed income as an optional benefit plan participants can choose – or not.

This links back to our broad philosophy and view that decumulation strategies should approach the challenges of retirement spending by maximizing spending, maximizing spending certainty, and addressing longevity risk. Our research also illuminates the value of incorporating guaranteed income into retirement portfolios to achieve more resiliency in spending across market environments, thereby potentially improving retirement outcomes for a plan sponsor’s eligible employees.

To uncover more insights and understand how guaranteed income can enhance retirement outcomes across various market conditions, be sure to read the full paper.