Efficient Retirement Portfolios: Using Life Insurance to Meet Income and Bequest Goals in Retirement Kristen Moore Nick A Halen Keira Dong Presenter: Qinglai (Patrick) Zeng Efficient Retirement Portfolios: Using Life Insurance to Meet Income and Bequest Goals in Retirement
Acknowledgement ´ This project is part of the Industry Partnership Program (IPP) at the University of Michigan ´ The authors gratefully acknowledge the support of the Society of Actuaries under the Center of Actuarial Excellence Grant as well as New York Life for their participation in the IPP. Efficient Retirement Portfolios: Using Life Insurance to Meet Income and Bequest Goals in Retirement
Competing Objectives in Retirement ´ Retirees face significant financial risk and competing financial objectives – Income – Bequest Efficient Retirement Portfolios: Using Life Insurance to Meet Income and Bequest Goals in Retirement
Partial Literature Review ´ Using life annuities to manage income risk – Chen and Milevsky (2003); Milevsky et al. (2006) ´ Using life insurance to maximize probability of reaching bequest goal – Milevsky et al. (2014, 2015) ´ Portfolios with traditional investments, life annuties, and life insurance in terms of several metrics related to income and bequest or legacy – Pfau (2014) Efficient Retirement Portfolios: Using Life Insurance to Meet Income and Bequest Goals in Retirement
Life Insurance can be a source of retirement income in addition to a source of protection – Life Insurance Retirement Plans (LIRPs) Supplemental Your Retirement Retirement Income years Premiums Pre-Retirement AND Premiums Beneficiaries Death Benefit Efficient Retirement Portfolios: Using Life Insurance to Meet Income and Bequest Goals in Retirement
Our Contribution ´ We examine the potential of life insurance to meet both income and bequest needs in retirement – Life Insurance Retirement Plans (LIRPs) ´ Among financial advisors, opinions about LIRPs are mixed ´ We contrast retirement portfolios that include a LIRP with those that include only investment products ´ We simulate market scenarios and demonstrate that inclusion of a LIRP can improve financial outcomes in retirement Efficient Retirement Portfolios: Using Life Insurance to Meet Income and Bequest Goals in Retirement
NYL’s Custom Whole Life Product (CWL) ´ CWL is a permanent life insurance product that pays dividends ´ NYL’s CWL is the first whole life insurance product that lets policyholders select how long they pay premiums and is designed to maximize the cash value accumulation in the policy ´ The cash value accumulation in a permanent life insurance policy grows tax-deferred ´ Retirees generally have tax-free access to their policy cash value, and can use partial surrenders and policy loans to supplement their retirement income Efficient Retirement Portfolios: Using Life Insurance to Meet Income and Bequest Goals in Retirement
Model Overview ´ Project all possible combinations of traditional assets (stocks and bonds) and non-traditional assets (Custom Whole Life) ´ Run Monte Carlo simulations through 250 market scenarios ´ Calculate the income risk and legacy potential ´ Compare the performance of the resulting portfolios Efficient Retirement Portfolios: Using Life Insurance to Meet Income and Bequest Goals in Retirement
Projecting All Combinations of Traditional Asset Portfolio and CWL • 16 retirement income withdrawal years Stock Stock • 6 face amounts Bond Bond • Total 96 possible CWL products • 4 x 96=384 possible allocations for each age • Calculate income risk Stock and legacy potential for Stock Bond Bond each of the 384 product combination • We project three issue Traditional Asset Allocations Custom Whole Life ages 35, 45 and 55 Efficient Retirement Portfolios: Using Life Insurance to Meet Income and Bequest Goals in Retirement
Measures of Portfolio Performance ´ Income Risk: the probability of running out of money after retirement – The income risk metric incorporates investment risk, longevity risk, withdrawal rate risk, inflation risk and sequence of returns risk. – In 250 scenarios, how often were income sources depleted before the 75 th percentile of longevity ´ Legacy Potential: the remaining asset upon death plus death benefits – In 250 scenarios, what was the traditional asset fund balance plus death benefit at the 50 th percentile of longevity? ´ Efficient Portfolios – Minimize income risk while maximizing legacy potential Efficient Retirement Portfolios: Using Life Insurance to Meet Income and Bequest Goals in Retirement
Results 1. CWL can help improve retirement portfolio performance 2. CWL policy with larger face amounts can be more beneficial 3. Withdrawal strategies for CWL policy 4. CWL adds value at all issue ages. In our simulations, effect was most pronounced at age 45. Efficient Retirement Portfolios: Using Life Insurance to Meet Income and Bequest Goals in Retirement
Value of CWL in retirement portfolios 12 Age 55 Age 55 Age 55 Age 55 Age 55 1200000 1200000 1200000 1200000 1200000 New Aggressive New Aggressive New Aggressive With CWL EIF Without CWL EIF Aggressive Aggressive Aggressive Aggressive New Growth New Growth New Growth Aggressive 1000000 1000000 1000000 1000000 1000000 Growth Growth Growth Growth Growth Balanced Balanced Balanced Balanced 800000 800000 800000 800000 Balanced 800000 Legacy Potential Legacy Potential Legacy Potential Legacy Potential Legacy Potential conservative conservative conservative conservative conservative Moderate Moderate Moderate Moderate Moderate moderate moderate moderate moderate moderate 600000 600000 600000 600000 600000 balanced balanced balanced balanced balanced Conservative Conservative Conservative Conservative Conservative growth growth growth growth growth aggressive aggressive aggressive aggressive aggressive without CWL 400000 without CWL without CWL without CWL without CWL 400000 400000 400000 400000 EIF EIF EIF EIF EIF 200000 200000 200000 200000 200000 0 0 0 0 0 0.00% 5.00% 10.00% 15.00% 20.00% 25.00% 0.00% 0.00% 0.00% 0.00% 5.00% 5.00% 5.00% 5.00% 10.00% 10.00% 10.00% 10.00% 15.00% 15.00% 15.00% 15.00% 20.00% 20.00% 20.00% 20.00% 25.00% 25.00% 25.00% 25.00% Income Risk Income Risk Income Risk Income Risk Income Risk Efficient Retirement Portfolios: Using Life Insurance to Meet Income and Bequest Goals in Retirement
Larger Face Amount can be more Beneficial 13 face amount age55 FA analysis 400k is better 1200000 than other face amounts 1100000 1000000 Legacy Potential FA 100k FA 160k 900000 FA 220k FA 280k 800000 FA 340k FA 400k without CWL 700000 600000 0.00% 2.00% 4.00% 6.00% 8.00% 10.00%12.00% 14.00% 16.00%18.00% Income Risk Efficient Retirement Portfolios: Using Life Insurance to Meet Income and Bequest Goals in Retirement
Longer withdrawal years reduce income risk at a sacrifice of legacy potential 14 Withdraw Year Analysis 1200000 1100000 1000000 Legacy Potential WY 10,11,12 900000 WY 13,14,15 WY 16,17,18 WY 19,20,21 800000 WY 22, 23, 24, 25 700000 600000 0.00% 2.00% 4.00% 6.00% 8.00% 10.00% 12.00% 14.00% 16.00% 18.00% Income Risk Efficient Retirement Portfolios: Using Life Insurance to Meet Income and Bequest Goals in Retirement
15 Lowest Income Risk Largest Legacy Potential Issue Initial Face Premium Age Asset Amount Burden Without CWL With CWL Without CWL With CWL 35 50k 100k 67.63% 14.4% 13% 1,144,719 1,208,479 45 200k 200k 44.30% 11.6% 4.8% 1,291,259 1,515,885 55 500k 400k 41.21% 12% 6.8% 1,039,859 1,114,554 q CWL reduces income risk and increases legacy potential at all issue ages q The effect is more pronounced at issue ages 45 and 55 Efficient Retirement Portfolios: Using Life Insurance to Meet Income and Bequest Goals in Retirement
Thank You! Efficient Retirement Portfolios: Using Life Insurance to Meet Income and Bequest Goals in Retirement
Investment Strategy before Retirement -- All results shown above are based on optimal investment strategies before 17 retirement Issue Age Pre-Retirement Investment Strategy 35 Age 35 – 65: Aggressive 45 Age 45 – 55: Aggressive; Age 55 – 65: Moderate 55 Age 55 – 65: Balanced • Efficient Retirement Portfolios: Using Life Insurance to Meet Income and Bequest Goals in Retirement
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