The Role of Variable Annuities in Addressing Retirement Risks

Abstract

Investors commonly fund their retirement through portfolios of stocks and bonds or mutual funds, which offer scant protection against the risk of a market downturn or of outliving their wealth. This article examines how adding a variable annuity with a guarantee lifetime withdrawal benefit (VA + GLWB) to a balanced portfolio can help reduce the risk of running out of money in retirement. It quantifies, through simulation analysis, the degree to which an allocation to a VA + GLWB can help mitigate two key retirement risks: longevity and sequence of returns risk. This risk reduction comes at the cost of a decrease in the expected future bequest. The article also explores how the timing of withdrawals and the asset allocation within a VA + GLWB impacts retirement outcomes.