A new strategy to guarantee retirement income using TIPS and longevity insurance: A second look

Shankar (2009) proposes a new investment strategy for retirees that bundles Treasury Inflation Protected Securities with a deferred annuity to guarantee real annual withdrawal rates of 5% or more with no risk of financial ruin. This strategy addresses three problems that retirees face: longevity risk, inflation risk, and liquidity risk inherent in the purchase of an immediate annuity. In our article, we evaluate the performance of this proposed strategy under realistic assumptions about costs, security design, and markets. In addition, we evaluate how the bequest motive might affect the choice between Shankar’s strategy and an immediate annuity.