Last Updated: August 24, 2009
There are many wealth management strategies that you could use when in retirement. In fact, authors of a recent article in the Journal of Financial Planning, report that there are six such strategies, each of which have unique trade-offs between wealth creation and income security.
What are those strategies and which one is best for you?
According to the authors, FPA members, Gaobo Pang, Ph.D., a senior economist at Watson Wyatt Worldwide, and Mark J. Warshawsky, Ph.D., director of retirement research at Watson Wyatt Worldwide, suggest the following six strategies:
- Systematic withdrawals from mutual funds
- Fixed payout immediate life annuity
- Immediate variable annuity for life
- Variable annuity plus guaranteed minimum withdrawal benefit
- Mix of withdrawals from mutual funds and fixed payout immediate life annuity, one-time wealth split at retirement, and
- Mix of mutual fund withdrawals and fixed payout life annuity, gradual annuitization at certain ages
According to Pang and Warshawsky, each strategy has its pros and cons. For instance, systematic withdrawals from mutual funds usually gives you opportunities for greater wealth creation, but that comes at the risk of large investment losses and income shortfalls. Meanwhile, using fixed and variable life annuities means that you forgo bequest considerations but you do get the highest incomes.
Between those extremes, the authors noted that a variable annuity with guaranteed minimum withdrawal benefit somewhat addresses both the need for income and wealth preservation. In addition, mixes of mutual funds and fixed life annuities deliver solutions broadly similar to, and even more flexible than, a variable annuity and guaranteed minimum withdrawal benefit strategy.
Still, the authors noted that there's no one strategy that's better than the other. "None of the strategies obviously dominate," they wrote. So, the best advice may be to segment wealth to establish minimum necessary consumption and hedge against longevity risk and then focus on growth opportunities. What's more, the authors suggested that you should optimize portfolios to account for benefits from defined benefit plans and Social Security.
Financial planners can help you create a wealth management strategy for your retirement portfolio. Find a financial planner.