Journal of Financial Planning : Retirement Income

[walkinwood]

There is a special report in the December issue of the Journal of Financial Planning on Retirement Income.

http://www.fpanet.org/docs/assets/9DB5687B-1D09-67A1-AC2C8D1D14656AF3/SpecialSection.pdf

The first article Retirement Planners find success with retirement income strategies is a survey of withdrawal methods used by financial planners and the effect of the selection. It has limited use to the members of this forum.

The second one is called Using a Hierarchy of Funds to Reach Client Goals. The author puts forth a Modern Retirement Theory (MRT) based on segmenting the client's need based on non-discretionary, emergency, discretionary and legacy funds. Sounds like an extension of the buckets theory.

The next article, Life Planning meets Retirement Planning is an interview with a financial planner. I found this one to be quite interesting & the Q&A can be used in our own planning.

The last article is 5 Social Security Strategies for Couples and I think will be interesting for people on the forum approaching that age. With each new article on SS strategies, I feel I have a better handle on the nuances. Unfortunately, I'm 17 years away from my full retirement age, so the rules will almost definitely change.

If you like the report, remember to download & store because it will be gone next month.
Enjoy.

 

[Onward]

Thanks. I'll check them out. I always enjoy the JFP. All these PDFs are making me want to get a Kindle.

 

[chinaco]

Thanks.

Nice high level summary of the conventional approaches to managing income in retirement... minus the marketing hype.

 

[RonBoyd]

This article, also, looks to be interesting (I haven't read it yet):

New Considerations in Monte Carlo Testing

As well as this Book Review:

http://www.fpanet.org/journal/BetweentheIssues/LastMonth/BookReviews/TheInvestmentAnswer/

This is not a book primarily for our members: it is a book for everyone else we know. It is clear and amazingly complete for its 85 pages. Even with its apparent brevity, the book is a systematic collection of clarity. You'll want your children, students, friends and others for whom you care to have this book. ...

Don't be fooled. The Investment Answer does not imply that investors can and should do it themselves. Instead, it presents what readers stand to gain or lose as they make the choice. Of course, FPA members like me hope that nonmember readers decide to hire me, because The Investment Answer describes investment activities that I do especially well.

 

[walkinwood]

Thanks Ron Boyd. I liked the Monte Carlo article. Access to a tool like that would give us another data point on portfolio survival.

My head starts to spin when there are so many probabilistic variables - portfolio performance, healthcare costs, longevity, inflation, emergency expenses etc. etc.. Because of that, for an early retiree like me, I still prefer a simple % of portfolio formula with an emergency fund put aside and periodic inspection & adjustments.

The Investment Answers book is getting a lot of press. We discussed it here too -
http://www.early-retirement.org/forums/f28/investment-book-from-dying-banker-53344.html

Edit: I must like this stuff. I rolled out of bed today and read an article on Monte Carlo simulations! Never in my imaginations of ER life would I have predicted this.

 

[lowflyer]

The next article, Life Planning meets Retirement Planning is an interview with a financial planner. I found this one to be quite interesting & the Q&A can be used in our own planning.

Yes, that was interesting. Nothing very new, but some I hadn't heard put quite that way before. Good info.

 

[chinaco]

Another article on Modern Retirement Theory.

BTW - This is yet another repackaging and branding/trademarking of tried and true techniques. I wouldn't call it a theory... IMO that is a misnomer. The clever play on words off of MPT doesn't work well. It is essentially a backhanded criticism (alternative to) of the 4% constant mix approach. It is more about allocating the money for certain purposes to manage it. I would replace the word Theory with Money Management (i.e., MRMM).


http://www.fpanet.org/docs/assets/12DF5C10-1D09-67A1-ACF16C03722738D5/2009Retirement.pdf

Because I don't like the name doesn't mean I am critical of the general approach.

IMO - it is a superior method to the x% constant mix method if the goal is to fund retirement at lower risk.

 

[Nords]

The last article is 5 Social Security Strategies for Couples and I think will be interesting for people on the forum approaching that age. With each new article on SS strategies, I feel I have a better handle on the nuances. Unfortunately, I'm 17 years away from my full retirement age, so the rules will almost definitely change.

Thanks-- I enjoyed this part:

Option 5: John and Mary wait to 70 but Mary claims spousal benefit at 66. In this example, Mary and John both delay benefits until age 70 with another twist. At his FRA, John files for his benefits but then immediately suspends the application, thereby enabling Mary (once she also
reaches her FRA at 66) to claim spousal benefits based on his higher earnings. At age 70, Mary reapplies to the SSA to begin receiving her own benefits, which are higher than half of John’s. (John does not need to reapply because it happens automatically.) This is the highest yielding of the five strategies, resulting in $54,000 in additional cumulative spousal benefit income over Option 3—the same strategy without the spousal benefits. It yields almost $700,000 more than the couple would have received if they had both started taking benefits at age 62.

However I can understand why someone would read the Monte Carlo article and decide to just work until they die:

Comprehensive Monte Carlo testing is a very flexible and powerful tool. For example, the financial planner has the option to work with a client to produce a customized level of long-term care (should the need arise) as input into the testing. Would the client want a private room in a nursing home? If the client wants to remain at home and never go into an assisted living facility or nursing home but instead wants a nurse at home 24 hours a day, how does that desire affect the client's ability to meet his goals? What would a more modest level of care look like?

 

[Dog]

These two comments resonated with me.


"Money’s the servant, not the master. You don’t live alifestyle based on the amount of money you have. You live a lifestyle that you’d like and then see if you can get enough money to do it. And if you don’t, maybe it takes waiting a year or two to do that."

and

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"A lot of people retire ​

​

​

​

​

​

from things as opposed to to things. And I think it’s extremely important that you retire to something as opposed to from something."


​

 

[Danmar]

OK but sometimes you find out you like a "bigger" lifestyle than you originally thought and have the means to pay for it. Certainly your lifestyle desires can change over time?

 

[Nords]

OK but sometimes you find out you like a "bigger" lifestyle than you originally thought and have the means to pay for it. Certainly your lifestyle desires can change over time?

They probably can, but after eight years of ER I desire less and less every year...

I certainly wouldn't have worked extra years just to build up a fund for a hypothetical "bigger lifestyle". That would've required extra rehab, psychotherapy, and perhaps maintenance medications...

 

[Danmar]

They probably can, but after eight years of ER I desire less and less every year...

I certainly wouldn't have worked extra years just to build up a fund for a hypothetical "bigger lifestyle". That would've required extra rehab, psychotherapy, and perhaps maintenance medications...

I see your point. I was thinking more of the case where for one reason or another you end up with more means than you were originally planning on. Probably not very common if ER is the primary objective.

 

[Nords]

I see your point. I was thinking more of the case where for one reason or another you end up with more means than you were originally planning on. Probably not very common if ER is the primary objective.

Another situation is where your ER hobbies turn out to generate more cash than they consume.

Lately the question has been how to handle the philanthropy, not how to expand the lifestyle. I can predict a trend, and if this one continues for three or four more decades then it's going to need a semi-log chart.

It's not straightforward to trickle it out a little at a time vs piling it up for a huge bequest, along with all the issues of "but what if I need it later", progeny affluenza, and estate-planning challenges.

 

[clifp]

I also really like the Journal of Financial Planning, but I always forget to check to see if there is a new issue until somebody on the forum post something so thanks WalkinWood.

I found this quote to be very good.

Guyton offers this example: A client with $1 million is doing a systematic withdrawal, taking out $50,000 a year, or 5 percent. The market drops dramatically, and the $1 million goes to $700,000,
so you tell the client he should reduce what he’s taking by 10 percent ($50,000 becomes $45,000). Now you have $45,000 of $700,000, which is about 6.4 percent.
"Your withdrawal rate has gone up and your withdrawal amount has gone down, and that flexibility, that small reduction, is exactly what you should
have done in a market that is very lowly valued,” he says.

I found it interesting that during the worse of the crisis people (and I am somewhat guilty of this) were talking about lower the SWR rate. Now this is probably ok if you retired with a million back in 2007 and were wondering if 40K was sustainable withdrawal for the next 35 years. However, much of the discussion was focused on current portfolio values. It was bad idea to look at 2008 $750K value of your portfolio and decide that dropping the withdrawal rate to say 3.5% cause that means a drop of income down to 26K which is pretty huge lifestyle reduction. Yet we still see this same suggestion pretty often including this article of advisers lowering the 4% rate.

My other observation reading the FP Journal is there is actually a lot of very good financial advice in the journal and suspect that most good financial advisers offer this advice to their clients. Some of the advice is counter intuitive to the uninformed like the above and also rebalancing from stocks and bonds when stocks are doing well and the reverse when bonds are doing well. I believe that many people with $1 million portfolio in their 401K/IRA etc would be better off to fork over a $1,000-$2,000 a year for a fee only financial adviser to provide and help implement these change. (Of course you can get most of the same advice for free on the forum. ). However, the problem is that there are some many Amerprise-like adviser and even for the good advisers it seems it is very hard to making giving advice as opposing to selling financial products with a load.

 

[Danmar]

Nords- I agree that giving it away (trickling it out over time) can be complicated. Hopefully as I get older it will be easier. May be a little better in Canada since health care less of an issue(but becoming more of an issue recently with the stress on our system)