Monday, May 21, 2012

Advisor Perspectives Column for May on Lifecycle Finance


My May column for Advisor Perspectives is now available. In "Life-cycle Finance and the Dimensional Managed DC® Pension," I describe the basics of life-cycle finance theory and how this theory relates to the new retirement solution provided by DFA affiliate Dimensional Retirement.

This solution is designed for 401(k) participants who wish to plan for retirement without really going through all of the steps needed to plan for retirement. Though readers here tend to be either financial planners or those taking a do-it-yourself approach to their retirements,  there are lots of useful issues to think about with regard to the objectives and strategies of the Dimensional Managed DC pension. Please have a look.

8 comments:

  1. Wade -

    1. What do you think are the most unique/important aspects of that DFA system for financial planners and do-it-yourselfers to think about?

    2. What aspects of that plan would you question or want to investigate further, if you were considering it for yourself??

    Dick Purcell

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    1. Hi Dick,

      Tough questions. Okay...

      1. It is more important to think more directly about how much income your wealth can support, rather than just considering your total wealth accumulation

      2. I would like to get a better handle on the sorts of savings rates required to meet retirement income goals, as well as what sort of asset allocations can be expected

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  2. Wade --

    Your article sure ignited a ruckus of discussion and controversy over at Bogleheads. Could you summarize that discussion for us here?

    Dick Purcell

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    1. Hi Dick,

      BobK started a thread about the article at

      www.bogleheads.org/forum/viewtopic.php?f=10&t=96820

      Some users are expressing skepticism that there is too much financial engineering, or that a 0.7% overall fee is too high. Some Bogleheads are also fiercely anti-SPIAs, and that shows up as well.

      I wouldn't call it a ruckus though. :)

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  3. Wade,

    Thanks for the link. I read the article as well as the papers by Hogan and Bodie that you link to.

    I have read two of Bodie's books. My current thinking is that Life-cycle Finance is "good in theory, but bad in practice." Bodie's book from 10 years ago ("Worry-Free Investing") in particular recommends two types of financial products whch don't seem "worry free" at all: structured products and TIPS.

    Structured Products, which provide a fixed time horizon, guaranteed minimum return and equity participation for upside sound good, but have been univerally critized by investment advisors.

    TIPS are currently "guaranteeing" a negative real return, which does not seem "worry free" to me.

    Hopefully this latest "Life-Cycle Finance" inspired financial product, which you write about, will turn out better.

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    1. Ari,

      Thanks for the feedback.

      You are right that TIPS are not exactly worry-free when you have to worry about how you can possibly save enough to meet your goals. But at least they do help you to know what to expect, which is what I think he meant with the title. As well, at that time TIPS yields were 3%, which made life a bit easier.

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  4. Your post is certainly one of the best source of valuable information every reader must follow. Glad to hear a lot from you soon. Keep on sharing! Thanks

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  5. As Jacks said... you are posting good information about financial life cycle... this will helps the people who want to make financial planning...i am waiting for more information, thanks keep posting...

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