Friday, December 2, 2011

Retirement Planning, December 2011

I'm just now finishing a first draft for my second column at Advisor Perspectives, which about GLWBs, as Vanguard recently introduced a relatively low cost version of them that has many people excited.  I'm happy with how the column is turning out, but working on it has kept me rather busy.  GLWBs are rather complicated products, and I had to first understand exactly how they work.  Fortunately, in my column I am suggesting that for the most part retirees are probably better off not using them.  That column should be finished and available in a couple of weeks.

As I am falling behind, I haven't had a chance to read all of the articles yet, but the new December 2011 Journal of Financial Planning looks to have lots of interesting articles that I want to read.

First, one that I did read is the 10 Questions with William Bengen, the father of safe withdrawal rates. I've always found his emphasis on the SAFEMAX, which is the worst-case maximum withdrawal rate experienced thus far in history, to be a much more useful concept than the later approach taken by the Trinity study. The Trinity study calculates portfolio success rates for a number of different strategies, which suggests to me a degree of scientific certainty that just isn't there, when thinking about what may happen in the future. I think the Bengen approach makes more explicit that a lower SAFEMAX could happen in the future, while this isn't as obvious with the Trinity study's probabilities tables.

Though readers of my blog will know these points by now, Morningstar just made available an article of mine which was previously locked behind a paywall at the Retirement Management Journal, and which summarizes my research about safe withdrawal rates.

But back to the William Bengen interview, there is lots of interesting stuff. Personally, I'm quite happy with his answer to Question 4. He also stands by the use of 4.5% as a safe withdrawal rate, which I don't really agree with, but I feel he has done his due diligence and don't begrudge him for the view.  For everyone's benefit, I hope he's right! In Question 7, Lance Ritchlin asks him about a point he made in a May Forbes article that retirees using 4.5% would still have all their initial principal remaining after 30 years in 96% of the historical periods.  I do wish to emphasize that this is true in nominal terms, not in real terms.  I explored that in an earlier blog entry

In Question 9, William Bengen seems to suggest that the next step for withdrawal rate research could be something like using a valuation-based asset allocation, which I have done for the accumulation phase.  Michael Kitces has explored this for retirement in one of his Kitces reports, though I don't think any public link is available.  I've thought of looking at this, but based on what I could already see with accumulations, it will be a foregone conclusion that a valuation-based asset allocation will increase sustainable withdrawal rates.  The only question, really, is by how much? Perhaps I will write up a column about this for Advisor Perspectives some day.

This might also be a good point to recommend the last few blog entries from Bob Seawright's "Above the Market" about data-driven analysis.  I think of myself as being very much data driven, but we must remind ourselves of something that I remind students about a lot in my econometrics class.  That is, I sort of think of the universe as one big Monte Carlo simulation, and all we get to observe is one run of the simulations.  While valuation-based asset allocation clearly provides improved risk-adjusted returns in the historical data (this is my finding), this could be because of an "unlucky sample" that makes it look like things work, but it is only a coincidence. There are no certainties and nothing can really be proved one way or the other, which is why I probably won't write much more on that topic. 

By the way, getting an official link for the revised version of my Fisher and Statman study is moving exceedly slowly, but you can see it now if you click to see the revised version of the article here.

Another article I look forward to read in the December 2011 JFP is "Improving Risk-Adjusted Returns Using Market-Valuation-Based Tactical Asset Allocation Strategies" by Kenneth R. Solow, CFP®, CLU, ChFC; Michael E. Kitces, CFP®, CLU, ChFC, RHU, REBC; and Sauro Locatelli. I haven't had a chance to carefully read it yet, but I think it is reaching some of the same sorts of conclusions that I have reached, but perhaps from a slightly different perspective.

And also, I really want to read the Special Report on Retirement Income Planning.

I have received a couple of requests for data or other information as emails or blog comments which I haven't got around to doing yet.  I haven't forgotten about you and will get to it some time.  Thanks for your patience, and have a good weekend!