Yesterday, I posted about my new research article, "An Efficient Frontier for Retirement Income."
In the comments, Aaron wrote:
Great article and I love your paper.
Getting the right splits in the product allocation is something we are spending some time considering here.
The dominance of the partial annuity strategies in your chart is consistent with out work here, but I suspect many will find the level of dominance a little surprising.
One question I have is in regard to the nominal/ indexed annuity differences. I understand why the nominal is on the frontier, given pricing and the effective discount rates. However, how far away is the indexed frontier in your model, and indeed the VA frontier. I would be very interested to see your figure with the 4 frontiers of stocks with bonds/ fixed SPIA/ nominal SPIA/ VA as a comparison.
Aaron, thanks, and here's the answer. This figure shows all of the combinations between stocks and one other asset (bonds, VA/GLWBs, inflation-adjusted SPIAs, and fixed SPIAs):
To just provide more intuition about what I'm doing, I will explain why the allocation to 100% Real SPIAs is where it is. The lifestyle goal and minimum needs are a real 6% of assets. 2% comes from Social Security. The real SPIA payout is 3.88%. Thus, every year of retirement, the real SPIA supports (2 + 3.88) / 6 = 98% of retirement spending needs. That is constant every year in every simulation. It is the only point that won't have any variability in the outcome. Since lifestyle goals are not met with this allocation, nothing is ever returned to the investment portfolio, and the remaining financial assets are always 0. Thus, the point is at x=98, y=0.
P.S. I'd like to thank Taylor Larimore for starting a thread about the article at the Bogleheads Forum. More discussions can be found there.