Contrasting Protected Lifetime Income Benefits (PLIBs) Against Other Annuities (Part 2)

My previous article in this series introduced protected lifetime income benefits (PLIBs), and was based on a larger research paper. PLIBs are similar to products that offer a guaranteed lifetime withdrawal benefit (GLWB), but I created a separate category since the income calculation process can be different, and income can decline with a PLIB. PLIBs are not new; similar strategies such as tontines have been available for centuries.

The article explores the efficacy of PLIBs against a retirement income strategy that does not include an annuity, as well as strategies which allocate to either a single-premium immediate annuity (SPIA), a deferred-income annuity (DIA, which could be a qualified longevity annuity contract, or QLAC, if purchased in a qualified account assuming certain provisions are met), or a GLWB. I used a utility framework for this analysis.

Overall, the potential benefits of the approaches vary depending on the specific client situation. One important determinant of efficacy is the portfolio withdrawal rate; there is relatively little difference among strategies for well-funded retirees (i.e., with lower withdrawal rates), while PLIBs were superior for more aggressive withdrawal rates and outperformed GLWBs.

PLIB strategies are an exciting evolution of GLWBs and should be considered as part of a holistic income strategy for retirees. In the next article in the series, I will explore some of the drivers of the efficiency of PLIBs and provide context on optimal risk levels.

The optimal strategy

The optimal retirement income strategy is determined using an approach based on the constant relative risk aversion (CRRA) utility function, shown in equation 1, where the amount of utility received varies depending on level of consumption and level of investor risk aversion

I used a utility-based approach, versus other more commonly used metrics among financial advisors such as the probability of success, since it better captures the economic implications of shortfall in retirement. The CRRA utility function incorporates the law of diminishing marginal utility, whereby negative outcomes (especially extreme negative outcomes) are weighted more heavily than positive outcomes. The specific utility approach used in this research is a modified version of the approach introduced by Blanchett and Kaplan (2013). Please refer to the main paper (appendix 1) for additional information on the particular model.