Retirees may outlive their savings by relying on SWPs

Study: New Generation of Retirement Products Provides Income to Last a Lifetime
Ernst & Young finds that retirees may outlive their savings by relying on systematic withdrawal programs

20 Feb 2008

NEWARK, N.J.--(BUSINESS WIRE)--Retirees who rely solely on target date funds to provide lifetime income may outlive their money, according to research and analysis from Ernst & Young. The research demonstrates a need for products that provide guaranteed income streams—enough to last for 20 to 30, or even more, years in retirement, according to a report about that research released today by Prudential Financial, Inc. (NYSE: PRU).

Retirement Income: The Value of Guarantees, examines current methods of providing retirement income within a 401(k) plan using Ernst & Young’s proprietary Retirement Analytics™ model to compare target date funds with Prudential’s guaranteed withdrawal benefit solution, Prudential IncomeFlex®.

“Target date funds are very popular right now in 401(k) and other group retirement plans because they provide a simple, set it and forget it approach to saving for retirement,” said Christine Marcks, president of Prudential Retirement. “But systematic withdrawal programs used with target date funds don’t address the risk of running out of money in retirement. As this important analysis reveals, that risk is still very real. On the other hand, guaranteed solutions like Prudential’s IncomeFlex— which use investment strategies similar to many target date funds — provide income to last a lifetime, often with money left for heirs.”

Research simulations show that relying on target date funds in conjunction with systematic withdrawal programs may exhaust savings one-third of the time when withdrawing at an inflation-adjusted rate of 5 percent of the initial balance. Simulations show that married couples may run out of money in more than half of the scenarios.

In contrast, the solution offered by IncomeFlex allows retirees to maintain income throughout their lifetimes, even if a 5 percent withdrawal rate depletes an individual’s account value. Retirees never outlive their income when protected by IncomeFlex in scenarios tested by Ernst & Young’s research, which was commissioned by Prudential.

“Ernst & Young’s unbiased research and analysis helps substantiate our conclusions that IncomeFlex redefines retirement. Employees can finally inoculate their 401(k) plans with a guarantee that protects their retirement income,” said Marcks. “With IncomeFlex, employees can invest aggressively, knowing their income has protection from market downturns and the opportunity to capture a higher level of that income. People no longer have to trade off between choosing how much income they receive and how long it will last.”

Among other key findings:

Retirees need lifetime solutions: Systematic withdrawal programs from target date funds are plagued with failures, causing retirees to outlive their retirement income.

Guarantees protect against market downturns: IncomeFlex protects retirees’ income streams from poor market performance. This also applies to the years leading up to retirement, allowing pre-retirees to plan a minimum income level, with certainty.
Retirees can capture market upswings: IncomeFlex allows greater participation in market upswings because its protection features provide the flexibility to invest more aggressively. IncomeFlex asset allocations remain constant, while target date asset allocations become more conservative over time.

Both solutions frequently leave money for heirs: Simulations show that the inheritance a retiree leaves behind with IncomeFlex was higher on average than target date funds when retirees systematically withdraw income from target date funds at a rate of 5 percent. However, retirees may be able to leave more money for heirs when they withdraw income from target date funds at rates of 3 percent or 4 percent.

Ernst & Young used a Monte Carlo simulation—factoring in market performance, inflation and mortality—to generate 2,000 different scenarios for each case study. Results of the research are based on averages across all scenarios.

The full report is available at www.prudential.com/retirementincome.