Thursday, January 19, 2012

Special Report: Retirement Income Planning (December 2011 JFP)

In December 2011, the Journal of Financial Planning included the section, Special Report: Retirement Income Planning. I'd just like to make a few notes/observations about it.

From Jonathan Guyton's article, it is interesting to learn that 74.8% of surveyed planners either always or frequently use systematic withdrawal plans. The alternatives are time diversification or buckets (37.6% either always or frequently use) and the floor/upside approach (32.8% is the corresponding number for it).

Guyton's column is one of the first times I've seen someone sort of actually criticize the floor/upside approach, or at least suggest that systematic withdrawals may be superior to it. He suggests that for most retirees there is not really such an obvious distinction between necessary and discretionary expenses. The survey indicates as well that planners using systematic withdrawals were more likely to have clients not need to make any significant changes to their plans, relative to the other approaches.  He writes, "the systematic withdrawal method for generating sustainable income has been much more effective in helping clients maintain their retirement lifestyles than either the time-based segmentation or essential-versus discretionary approaches."


He also suggests that dynamic withdrawal policies that respond to market conditions such as outlined in his earlier research articles are more popular (by a 2 to 1 margin) that the baseline assumption of early withdrawal rate studies that retirees use either fixed real or nominal withdrawals.

Finally, there is an interesting table showing that the mean initial sustainable withdrawal rate recommended by financial planners is 4.17%. Since many of these planners are using dynamic or variable withdrawal strategies, the safe withdrawal rate should be a bit higher than maintaining a fixed inflation-adjusted withdrawal no matter what. That was the point of Guyton's earlier research articles.


Next, Carly Schulaka's column includes an interesting point about what sorts of retirement income products would be helpful for retirement planning. Popular answers include an automated buckets approach, more transparent and affordable annuities, and more innovations for long-term care insurance and annuities. Those all look like good research topics.


Next, Cheryl Krueger's column makes the basic but important point that people need to plan for living longer than their life expectancy. You have a 50% chance of living longer than your life expectancy, and as you get older, your remaining life expectancy also increases. She talks about the "planning age" to use in making projections for retirement planning.  For instance, I used an age of 100 in my "Getting on Track for a Sustainable Retirement: A Reality Check on Savings and Work" article. She does make a good point that I already know, which is that at some point I need to switch from using the Social Security Administration mortality data to data that accounts for future life expectancy increases and for the fact that people actually making plans for their retirement will tend to live longer than the average person.

Next, Matthew Greenwald provides an introductory article about the challenges of retirement planning related to longer lifespans and fewer sources of guaranteed income. He covers the various risks facing retirees.

Not part of the Report, but Betty Meridith also has an interesting column about retirement planning for the less well-to-do. She shows the sources of income for Americans aged 65 and older in 2008 as reported by the Social Security Administration. Only 12.7% of the income for this group comes from financial assets. These are averages across everybody. That reminds me, in Table 1 of an article I have in the National Tax Journal from 2006 based on the same data source (see page 26 of the pdf file / page 24 of the article), I looked at these income sources broken down by 10 different ratios of income to the poverty level. Income from assets really isn't a particularly important income source for most retirees across the income distribution. Safe withdrawal rates are not all that relevant for a lot of people, it seems. For many Americans, the best strategies may be to consider delaying Social Security and increasing annuitized income sources. She expresses three concerns from a report by the Government Accountability Office (GAO): older Americans may be at risk as they are too dependent on employment income, they are starting Social Security earlier than optimal, and they are decreasing their stock holdings too much.


On the last point about stock holdings, my article in the January JFP does suggest that lower stock allocations may not be so bad afterall for retirees, as long as they got there in a systematic way and didn't sell off in a panic after the 2008 market drop.


Finally, FPA members can access a report by Zach Parker and Paul Lofties called, "Capturing the Income-Distribution Opportunity: A Historical Analysis of Distribution Philosophies and a Solution for Today." Actually, this is an important paper.  I know it better in its published form from the Spring 2011 Retirement Management Journal as winner of their first thought leadership award.  I'm not sure if there is any version of this paper out there that is not locked behind a paywall.  But I think the article is sufficiently important that I would like to discuss more in a separate blog entry.


That's all for now.

2 comments:

  1. Good report on this JFP special section. Re: Jonathan Guyton's summary of the survey, I think that an underlying issue is that the best retirement income planning approaches differ by income/wealth category--Here's an oversimplified view.

    Low Income--make the most of SS also use public benefits where available
    Middle Income--focus on not running out of money
    High Income--manage bequest value

    Planners who filled out the survey deal mostly with high income clients, so it's perhaps not surprising that systematic withdrawal is the most popular approach. (If I recall correctly, 80% of clients of those surveyed faced little danger of running out of money.) Why pay for income guarantees if they are not needed?

    I'm working with a group of people from the Society of Actuaries, FPA, and Betty Meredith's InFRE on a similar survey and follow-up conference in May specifically focused on retirement planning for middle-income clients. It will be interesting to see what we learn.

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    1. Joe, thanks that's a good point. High net worth folks may meet their spending needs with a low enough withdrawal rate.

      I'm interesting to hear what you find in May. Thank you, Wade

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