Interact with the Efficient Frontier Tool to Illustrate Downside Income Risk Versus Accumulation Return and Residual Wealth.

This application allows users to model select retirement portfolio case studies using Ibbotson Associates, Inc.’s Efficient Frontier Framework for both accumulation and income optimization.

The tool compares portfolios made of traditional stock/bonds with portfolios that include a balanced allocation guaranteed annuity. The purpose of the tool is to let you interact with the Case Study data from Ibbotson’s analysis of retirement portfolios with and without guarantee product designs to see how different allocations can help improve client outcomes.

Here’s How to Use the Tool:

- Step 1: Use the slide bar to enter your Asset Amount.
- Step 2: Move the slide bar to indicate your Current Investment Mix between Equities and Bond percentages
- Step 3: Select one of the three scenarios to match your age and profile: Age 55, Age 60 or Age 65.
- Step 4: Select “Income with rider” or “Accumulation” to define the investment plan.
- Step 5: Click the “Optimize Portfolio” button to view.
- Feel free to play and interact with the model to see how it responds to your input. The graphic images will change and appear to match your input. The graphs will represent the changes in data input or at what point you place the cursor. For example: the average assets at death and probability of success of the portfolio represented by that point.
- Set “Asset Amount” to the right sum.
- Move the slide bar to indicate your current Annuity investment.
- Interact with the three scenarios to match your age and profile: Age 55, Age 60 or Age 65.
- Select “Income with rider” or “Accumulation” to compare the investment plan.
- The screen will generate a color chart modeling your selections and assigning a color coded graph to indicate the following: BLUE: Indicates current selected baseline portfolio; Green: Reveals selected strategy (for Income with rider or Accumulation); Grey: Other equity/bond mixes.
- Optimized Portfolios screen shows you the portfolio with the greatest probability of success and the highest assets at death for each point. You may place your cursor on any point of the graph to see the mix, the average assets at death and probability of success of the portfolio represented by that point.

For the base case, the study assumed a traditional baseline portfolio made up of a mix of stocks and bonds and uses a 4% inflation-adjusted systematic withdrawal rate to generate retirement income. In addition to this income, or distribution, view of efficient portfolios, an additional base case allows to focus on growth and safety of the money you are saving for retirement.

The base case assumptions are represented by different blends of stocks and bonds based on client’s current risk tolerance and objectives. The stock portfolio in the modeling tool is represented by a diversified large cap mutual fund while the bond portion is represented by a diversified bond fund.

The mutual fund allocation consisted of a mix of equity and bond allocations with the equity share ranging from 0% to 100% and the remainder allocated to bond funds. The equity/bond mix remained constant throughout the projection period.

For strategies that included an FIA with a Guaranteed Lifetime Withdrawal Benefit (GLWB), retirement income was funded by a combination of mutual fund withdrawals and a roll-up of the GLWB rider until age 65. Effectively, the presence of the guaranteed income of the annuity helps reduce the strain on the mutual fund withdrawal strategy and increases the probability it will be depleted. Withdrawals are assumed to be paid from the annuity first, with any remainder coming for the portfolio, until the portfolio is exhausted. If the annuity withdrawal exceeds the target the excess is assumed to be saved to fund future retirement spending.

The maximum allocation to an annuity was assumed to be 60%.

The stochastic scenarios were run for each of the assumed annuity/equity/bond allocations. An income shortfall was calculated in each scenario. A shortfall occurred if the income was less than the amount of the required annual withdrawal from the portfolio. Success is defined as meeting the increased income threshold from the stated inflation each year in retirement. For each GLWB/equity/bond allocation, the probability of meeting the income goal was determined by dividing the number of scenarios that had an income shortfall by the total number of scenarios (1,000). This “Probability of Success” is depicted as the “X” axis on the efficient frontier.

A bequest (assets at death) was also calculated for each stochastic scenario. The assets at death value equals the mutual fund value plus the VA/FIA cash value at the end of the year of death. The incidence of the payment of the assets at death was based on the same stochastic mortality and stochastic mortality improvement factors that drove the determination of longevity. For each GLWB/equity/bond allocation, an average assets at death value was calculated. The bequest was then averaged over the 1,000 stochastic scenarios for each annuity equity/bond allocation. This “Average Assets at death” is depicted as the “Y” axis on the efficient frontier.