Supporting Retirement Expenditure Using a Combination of State Pension, Investment Portfolio, Bond Ladders, and Annuities

Abstract

In this paper, the effect of using retirement income from a variety of sources on initial income rate and the survivability of the income is investigated. The sources of income include pre-existing (‘baseline’) inflation linked guaranteed income (e.g., state pension and uncapped direct benefit pensions), immediate annuities (including level, and those with escalation and inflation linked options), bond ladders, and investment portfolio. Assuming an annual decline in expenditure of 1 to 2% over the course of the retirement period, the results indicate that including an inflation linked annuity provides the best performance when the retiree has a baseline annual income of less than about 10% of their initial portfolio value, while a bond ladder provides the best solution when the baseline income is greater than about 20% of the initial portfolio value. The robustness of portfolio approaches were improved by using percentage of portfolio with a ceiling at required income level.

Keywords: safe withdrawal rates, retirement expenditure, annuities, bond ladders

JEL Classification: G11, G12, D14