Optimize to Find Efficient Income Strategies

The powerful optimization feature of the tool helps you find an income strategy, a combination of SWP allocation, bond ladder configuration and annuity purchase amount, that is efficient on the risk-reward frontier. Rather than manually trying different income strategies one-by-one, you can analyze hundreds of those strategies at the click of a button to quickly find the efficient one.

Inputs for Optimization
The optimization button is a blue circle with a white star and can be found in the upper-right corner of the Plans tab. The figure below illustrates where the optimization button can be found.

Prior to running the optimization feature, you should enter basic information about the client and a set of bond ladder and annuity options being considered for the client. Separate articles describe the use of each of those tabs.

Once you press the optimization button, the next step is to choose the options for the SWP model allocation, Bond Ladder configuration and annuity purchase option for inclusion in the optimization analysis. A check in the box next to each option means that it will be considered in the optimization, while an unchecked box signifies that this option will be omitted from the analysis. In basic mode, for each annuity product, the optimization feature allows you to set three different purchase amount options, expressed as a percentage of total assets. The screenshot below provides an example that appears after hitting the optimization button.

After determining which, if not all, of the options you would like to include, press the optimize button to initiate the optimization feature of the tool. The tool then determines all the combinations of SWP allocations, bond ladders and annuity purchase options, each called an income strategy. In the example above from the Brady Case Study, the first feasible income strategy is the Conservative model allocation in SWP, no bond ladder, no Immediate annuity, no variable annuity. The second strategy would change the variable annuity to 10% of total assets. Similarly, the tool determines every feasible income strategy combination from the options given by the user.

The optimization feature then simulates multiple income plans using the desired income, adjusted per the phases outlined in the parameters tab, with each of the possible income strategies. The risk-reward metrics are collected for each income strategy, using which optimization process selects the following plans:

Maximum Confidence: This plan represents the strategy that results in the highest number of retirees out of a thousand who are receiving the full desired income for the duration of the planning horizon. See Retirement Income Analysis Framework article for explanation of this metric.

Least Shortfall: This plan represents the strategy that minimizes the cumulative gap between the desired income and the actual income received over the planning horizon for the Unfortunate Retiree. See Retirement Income Analysis Framework article for explanation of Unfortunate Retiree.

To read more about how to present an income plan strategy/performance as a story rather than a statistic, view the following link: Presenting Plan Performance. To understand more about the methodology driving the Income Discovery analysis, please view the Methodology document offered in the Income Discovery Pro application. A detailed explanation of the risk-reward metrics can be found here: Retirement Income Analysis Framework.

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