
Blending Smoothed Bonus and Market-Linked Portfolios for an Optimal Retirement
In the previous article, the benefits of smoothed bonus portfolios for living annuitants were explored, highlighting their ability to mitigate downside risk during market downturns, as indicated by their improved “Time to Ruin” in the worst 10% of scenarios modelled. This article explores a “best of both worlds” strategy by blending a smoothed bonus and market-linked portfolio within a living annuity construct to balance long-term growth with capital protection. Overview This study compares three portfolios: a market-linked portfolio, a partially vesting smoothed bonus portfolio, and a “blended” portfolio consisting of equal allocations to the market-linked and partially vesting smoothed bonus portfolios. Within the blended portfolio, the allocation to the smoothed bonus portfolio will be used to service the monthly income requirement. All portfolios have identical underlying asset allocations of 60% equities, 20% bonds, 10% property, and 10% cash. The investigation used 1 000 randomised scenarios (including returns for each asset class and inflation) to assess the portfolios’ performance over a 30-year retirement period. The statistic used for comparison is Time to Ruin (TTR), which measures how long an annuitant’s capital can sustain inflation-adjusted monthly drawdowns. Drawdown rates start at 6% or 8% per annum and are adjusted annually on the policy anniversary date. ...