Retirement Income Strategies - Wade Pfau

[Midpack]

For those (fellow aspiring geeks) who enjoy more of the 'nuts and bolts' of retirement income planning...

Retirement Researcher Blog: Choosing a Retirement Income Strategy: Outcome Measures and Best Practices "an overview of the basic building blocks of retirement income strategies. These eight strategies will be analyzed with six retirement outcome measures over a 30-year retirement period: the average amount whereby spending falls below the minimally acceptable level, the average spending amount, the remaining bequest at the end of the retirement period, the minimum spending amount for any year in the retirement period, a measure of whether spending increases or decreases over time defined as spending in the first year divided by spending in the 30th year, and the value of total spending after accounting for diminishing returns from increased spending for a client with somewhat inflexible spending needs."

Retirement Researcher Blog: Choosing a Retirement Income Strategy: A New Evaluation Framework "seeks to explain best practices, highlight potential missteps and problems which may arise, clarify areas where controversies and disagreements remain, and suggest further enhancements and modifications to make retirement income frameworks as useful as possible."

More great stuff from Wade Pfau. I'm (seriously) on pins and needles awaiting the next (third) PDF in the series. "Coming up next will be an article which attempts to apply some of this in practice"

I can't wait!

My favorite sections from the first PDF article. YMMV

The underlying asset return assumptions guiding the analysis should not simply be based on historical data averages. The practice of using historical averages as inputs to simulate stock and bond returns must stop. Return assumptions should be calibrated to match current market conditions, including current bond yields and a reasonable equity premium. With low bond yields at present, some readers may view using current conditions in long-term forecasts as too pessimistic. But with sequence of returns risk, what happens in the early part of retirement matters a great deal more than what happens later. Even if conditions normalize with higher real bond yields in 10 or 15 years, that may provide only minor relief to those retiring today. Wealth depletion in the early retirement period will be hard to overcome.

Relatedly, data assumptions must be consistent across all product categories. This is a problematic aspect in various existing analyses. It is a mistake to use both current quotes for SPIA payout rates and historical data averages to guide stock and bond market returns. Such an approach will disadvantage SPIAs, as current bond yields and market conditions used to price annuities are much lower than the historical averages guiding the simulations for systematic withdrawals.

Another matter relates to building a floor, or at least having funds readily available to build a floor. Is there any effort to either lock-in lifetime flooring to protect from longevity risk or to monitor the amount of flooring that could be purchased as the portfolio fluctuates and take action to lock in flooring if the portfolio falls too low? Or is the portfolio left exposed depletion? Creating flooring does not necessarily require building a build ladder or purchasing annuitized products, but for practical purposes it requires vigilance to lock in some amount of client-identified minimal needs before it becomes too late in the event of a market drop.

 

[pb4uski]

With respect to the sequence of returns risk, one could assume the low interest rates continue for some period of time and then grade from low rates to a long run assumptions over a certain period. It would be more conservative than using only long term rates and less conservative than assuming the current low interest rate environment will continue indefinitely.

 

[Ken11]

With respect to the sequence of returns risk, one could assume the low interest rates continue for some period of time and then grade from low rates to a long run assumptions over a certain period. It would be more conservative than using only long term rates and less conservative than assuming the current low interest rate environment will continue indefinitely.

Yes. And its interesting to note that we've already been in this low rate environment for a few years now.

 

[Ken11]

Id love to see these withdrawal strategies bounced against the Firecalc data as well.
I wonder if the conclusions would be the same.
Monte carlo assumptions of non auto-correlated normal distributions of returns bug me.