What if Target Date Funds Used Annuities?
January 18, 2023 by John Manganaro
Anew paper published by the National Bureau of Economic Research evaluates a proposed variant of the popular target date fund vehicle used in employer-sponsored retirement savings plans, with the goal of determining whether redirecting allocations from bonds to deferred income annuities boosts participant outcomes.
The analysis was put together by John Shoven of the Department of Economics at Stanford University and Daniel Walton of Uber Technologies (formerly with Stanford University). The duo asks what would happen if, rather than increasing the allocation to bond funds as retirement approaches, a TDF instead gradually purchased deferred life annuities beginning at age 50.
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Wink’s Note: This research studies what would happen, if annuities were used instead of bonds, in target date funds of 401(k)s.
So, the researchers compared two scenarios: one with a lump-sum income annuity purchase at retirement, and a second with periodic annuity purchases up until retirement.
What the study’s authors found is that “in approximately 85% to 90% of the scenarios evaluated, the gradual purchase of annuities over time results in better outcomes from a wealth maximization perspective compared with waiting for age 65 to buy a single annuity.”- sjm