An Efficient Frontier for Retirement Income

12 Pages Posted: 25 Sep 2012

See all articles by Wade D. Pfau

Wade D. Pfau

The American College for Financial Services; Retirement Researcher

Date Written: September 24, 2012


This article outlines a different way to think about building a retirement income strategy, which moves dramatically away from the concepts of safe withdrawal rates and failure rates. The focus is how to best meet two competing financial objectives for retirement: satisfying spending goals and preserving financial assets. The process described here focuses on allocating assets between a portfolio of stocks and bonds, inflation-adjusted and fixed single-premium immediate annuities (SPIAs), and immediate variable annuities with guaranteed living benefit riders (VA/GLWBs). This process incorporates unique client circumstances, bases asset return assumptions on current market conditions, uses a consistent fee structure for a fair comparison between income tools, operationalizes the concept of diminishing returns from spending by incorporating a minimum needs threshold and a lifestyle spending goal, uses survival probabilities to calculate outcomes, and incorporates client preferences to balance the competing financial objectives for the final choice among the collection of allocations that define the efficient frontier for retirement income. Results are presented for a 65-year old couple whose lifestyle needs require a 4% inflation-adjusted withdrawal rate from retirement date assets. Their efficient frontier generally consists of combinations of stocks and fixed SPIAs. Perhaps surprisingly, bonds, inflation-adjusted SPIAs, and VA/GLWBs do not serve a useful role in the couple’s optimal retirement income portfolio.

Keywords: retirement planning, retirement income modeling, efficient frontier, annuities, systematic withdrawals

JEL Classification: C15, D14, G11, G17

Suggested Citation

Pfau, Wade D., An Efficient Frontier for Retirement Income (September 24, 2012). Available at SSRN: or

Wade D. Pfau (Contact Author)

The American College for Financial Services ( email )

630 Allendale Rd
King of Prussia, PA 19406
United States


Retirement Researcher ( email )

1900 Gallows Rd, Suite 350
Vienna, VA 22182
United States


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