ALRIE is a Better Nest Egg to Lifetime Income “Translator”

In his October 10, 2018 article, “Retirement savings:  How to translate your nest egg into monthly income,” Robert Powell suggests two possible ways of expressing accumulated savings as lifetime income.  According to Mr. Powell, the easiest way to do this is to obtain a quote for a single premium immediate annuity (SPIA) as, “Doing so will give you a sense of how much monthly income you would receive for life from an annuity based on the value of your retirement nest egg.” 

While we support using life insurance company annuity pricing to estimate lifetime income of equivalent value, we believe that the life annuity quotes used for this purpose should be for inflation-indexed life annuities, not fixed dollar life annuities, as most retirees expect their expenses to increase with inflation (at least to some degree) after retirement.  The approach suggested by Mr. Powell considers neither post-retirement inflation nor pre-retirement inflation and is therefore not particularly realistic.  For this reason, we believe that the Actuarial Lifetime Retirement Income Estimator (ALRIE) Excel workbook that we released in our post of June 9, 2018 (and made available in the Spreadsheets section of our website) is a better and more robust “translator” of your nest egg into real lifetime income than the approaches discussed in Mr. Powell’s article.

Using inflation-indexed annuity pricing assumptions, ALRIE provides answers to the following questions:

1. How much real dollar monthly lifetime income commencing X years from now will my current nest egg of $Y support? 
2. How much real dollar lifetime income commencing X years from now will my projected future nest egg of $Z support? 
3. What percentage of my future wages will I need to save over the next X years to increase my nest egg from $Y to $Z?
   

And, ALRIE does all of this without having to actually obtain an annuity quote.   It also provides these answers for couples as well as single individuals.  ALRIE is based on sound actuarial principles and is very easy to use.  It also flexible and permits entry of assumptions that differ from the inflation-indexed annuity default assumptions.  Therefore, users can get sense of their projected lifetime income under different future investment return, inflation or longevity assumptions.

We agree with Mr. Powell that there are benefits of expressing accumulated savings in the form of lifetime income, and we support the general intent of the proposed legislation mentioned in his article requiring that account balance to lifetime income translations be made available to defined contribution plan participants.  In our post of July 11, 2018, we challenged the American Academy of Actuaries to either improve ALRIE or endorse it in furtherance of their missions to serve the public and to provide actuarial expertise on legislative proposals.  We have also separately suggested to the Department of Labor that they consider replacing the current translator on their website with something more robust, like ALRIE.