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Efficient Retirement Portfolios: Using Life Insurance to Meet Income and Bequest Goals in Retirement

Author

Listed:
  • Fangyuan Dong

    (Paid Growth Analyst, Airbnb, Inc., 888 Brennan St., San Francisco, CA 94103, USA)

  • Nick Halen

    (Strategy, Research and Analytics, New York Life, 51 Madison Avenue, New York, NY 10010, USA)

  • Kristen Moore

    (Department of Mathematics, University of Michigan, 2074 East Hall, 530 Church Street, Ann Arbor, MI 48109-1043, USA)

  • Qinglai Zeng

    (People Advisory Services, Ernst & Young LLP, 155 North Wacker Drive, Chicago, IL 60606, USA)

Abstract

Life Insurance Retirement Plans (LIRPs) offer tax-deferred cash value accumulation, tax-free withdrawals (if properly structured), and a tax-free death benefit to beneficiaries. Thus, LIRPs share many of the tax advantages of other retirement savings vehicles but with less restrictive limitations on income and contributions. Opinions are mixed about the effectiveness of LIRPs; some financial advisers recommend them enthusiastically, while others are more skeptical. In this paper, we examine the potential of LIRPs to meet both income and bequest needs in retirement. We contrast retirement portfolios that include a LIRP with those that include only investment products with no life insurance. We consider different issue ages, face amounts, and withdrawal patterns. We simulate market scenarios and we demonstrate that portfolios that include LIRPs yield higher legacy potential and smaller income risk than those that exclude it. Thus, we conclude that the inclusion of a LIRP can improve financial outcomes in retirement.

Suggested Citation

  • Fangyuan Dong & Nick Halen & Kristen Moore & Qinglai Zeng, 2019. "Efficient Retirement Portfolios: Using Life Insurance to Meet Income and Bequest Goals in Retirement," Risks, MDPI, vol. 7(1), pages 1-11, January.
    • Handle: RePEc:gam:jrisks:v:7:y:2019:i:1:p:9-:d:199049
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    References listed on IDEAS

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    1. Virginia Young, 2004. "Optimal Investment Strategy to Minimize the Probability of Lifetime Ruin," North American Actuarial Journal, Taylor & Francis Journals, vol. 8(4), pages 106-126.
    2. Moshe A. Milevsky & Kristen S. Moore & Virginia R. Young, 2006. "Asset Allocation And Annuity‐Purchase Strategies To Minimize The Probability Of Financial Ruin," Mathematical Finance, Wiley Blackwell, vol. 16(4), pages 647-671, October.
    3. Bayraktar, Erhan & Young, Virginia R., 2016. "Optimally investing to reach a bequest goal," Insurance: Mathematics and Economics, Elsevier, vol. 70(C), pages 1-10.
    4. Bayraktar, Erhan & Promislow, S. David & Young, Virginia R., 2014. "Purchasing life insurance to reach a bequest goal," Insurance: Mathematics and Economics, Elsevier, vol. 58(C), pages 204-216.
    5. Erhan Bayraktar & S. David Promislow & Virginia R. Young, 2015. "Purchasing Term Life Insurance to Reach a Bequest Goal: Time-Dependent Case," North American Actuarial Journal, Taylor & Francis Journals, vol. 19(3), pages 224-236, July.
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    Cited by:

    1. Pablo Garmendia & Gabriela Topa & Teresa Herrador & Montserrat Hernández, 2019. "Does Death Anxiety Moderate the Adequacy of Retirement Savings? Empirical Evidence from 40-Plus Clients of Spanish Financial Advisory Firms," IJFS, MDPI, vol. 7(3), pages 1-13, July.

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