Originally Posted by Onward
Very interesting article, particular for its redesign of the optimal glide path.
Yep, the "increasing equities" approach is a new twist, for me anyway; makes me think about decumulation in a different way - which is a good thing. It's always good to challenge what you think you know.
Below are some of the questions an 'increasing equities as you age' approach generates. I think questions #3 & 4 are particularly important.
AnonymousJuly 26, 2013 at 10:15 AM
This is an interesting and provocative article. Thanks for the deep thinking, Wade!
1. In your paper, you assume a perhaps unrealistic overall real return of 1.54% for inflation-adjusted SPIA's, although the top of the yield curve for 30-year TIPS is currently 1.35% and the yield for 10-year TIPS is around 0.40%. Similarly, your assumption of a 4.49% nominal return for fixed SPIA's is very high in relation to today's available SPIAs, where even a 4% internal rate of return is hard to find.
2. If you are going to value the annuity income stream from a SPIA portfolio in terms of the present value of the remaining lifetime income, are you also willing to incorporate the Social Security income stream into your analysis? If so, how might that alter your conclusions?
3. You portray the early years of retirement as ones where there is an elevated sequence-of-returns risk and the latter years as ones where an increasing proportion of assets in stocks is appropriate. However, suffering a large loss from a stock-heavy portfolio in very old age could be one that cannot be recovered from -- just around the time that expensive health events become more likely. I question the wisdom of encouraging a stock-heavy portfolio in very old age unless leaving a bequest is the main objective.
4. There are psychological and behavioral elements that could use attention. For instance, people often buy SPIAs for peace of mind-- so they are not so psychologically captive to volatile markets. How do you put a value on sleeping well at night, worrying less about returns and accumulations, and avoiding regret about investment decisions? Given that the pain of losing a certain $ amount tends to greatly exceed the joy of an equal $ gain, I submit that encouraging a larger proportion of volatile investments (i.e., stocks) as one ages may be a catalyst for unhealthy emotions, especially if a person is unlikely to live long enough to recover from a large market drop.
5. Is there a place in your analysis for individuals who wish to hold no equities at all -- and perhaps only bonds? This would be useful for people who have more assets than they need to retire on and deliberately choose to dial back on volatility or risk with their investments.