Sunday, February 3, 2013

February 2012 Journal of Financial Planning

Now that I have an iPad, reading the Journal of Financial Planning becomes much easier and more efficient. I haven't been good about keeping up with past recent issues, but I've already made my way through the new February issue. What follows are a few short observations from the new issue:

Congratulations to Prof. John Grable from the University of Georgia on becoming the academic editor at the Journal. I think it's been a long time since they've had someone in this position. I've only met Prof. Grable once, and I must admit that I haven't read many of his research articles as he has different research interests than me. But he is very well respected and this should be a good sign. Michael Kitces continues on as the practitioner editor, which is great as well. My research interests overlap much more with Michael.

Bill Winterberg, who kindly taught me how to play multiple hand blackjack at the recent AICPA conference, is the subject of this issue's 10 questions. Now that I'm getting updated with technology, this was an interesting read for me. He is the resident technology guru in the financial planning world. In the interview, he discusses inStream, a new firm in Virginia which is looking to do some rather interesting things. They have the potential to crowdsource financial planning decisions and give us a much better perspective on how real people are making their retirement spending decisions, and how these decisions are playing out in the subsequent years. This is a company worth watching.

Jonathan Guyton's column is about retirement. It is about what to do when someone seems to consistently have one-time large expenses going beyond the sustainable amount of income they are supposed to be withdrawing from their portfolio. He suggests to have a core portfolio in which someone always uses the pre-determined sustainable withdrawal rate, and to have a separate discretionary portfolio which can be used for these one-time expenses until it is depleted. It's an interesting read, because Jonathan Guyton is one of the biggest opponents of the essential versus discretionary retirement income strategy, where someone uses safer assets to meet their basic needs and then uses more volatile assets to try to get up to their lifestyle spending goal. What he is doing here sounds a lot like essential versus discretionary, except that he is counting the lifestyle goal as part of essential expenses and this lifestyle goal can still be funded with volatile assets. He makes a point that the discretionary portfolio for the one-time expenses should actually be invested more conservatively (rather than aggressively), because people might want to spend down this part of their assets more quickly and so there is a shorter time horizon. This taps in, as well, to the idea that retirement spending declines with age. But it essentially turns essential versus discretionary on its head by having essential expenses covered with a more aggressive asset mix. This column should trigger some good debate.

The other article about retirement in this journal is one by myself, and it has been renamed as "A Broader Framework for Determining an Efficient Frontier for Retirement Income." I have written about this article before, and I see that the Bogleheads have kindly started a new thread about it which includes some critical comments. This framework is still not complete, as it doesn't include taxes, deferred income annuities, or the ability to build a bond or annuity ladder, but this provides my best efforts to layout a framework for thinking about retirement income. There are so many limitations to safe withdrawal rates, as I discussed in the introduction of the article, and this article provides my best effort thus far to get around those limitations.


5 comments:

  1. thanks Wade. I am wondering whether your research on the efficiency of SPIA's might point to the value (for retirees with adequate savings) of "buying" a social security "annuity" by delaying taking social security till 70?. Given that social security has a much higher inflation adjusted "return" than fixed or real SPIA's it would seem that the most "efficient" use of retirement savings (for those considering partial annuitizing) would be to "buy" a social security annuity as a priority ahead of buying a commercial SPIA. And then purchasing a commercial SPIA only if extra annuitizing is desired.
    Or does the immediacy of a SPIA compared to the delay of a "purchased" social security "annuity" somehow skew the efficiency?
    Based on your research it seems the efficient frontier retirement income strategy for a great many retirees would be: Delay taking social security as first priority, then purchase SPIAs as needed
    Thanks again for all your research, including your excellent summaries of existing research.

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    1. Derek,

      Thank you for the comments. I think you are right. When I get around to allowing the age of Social Security uptake to vary, I have a strong feeling that delaying to 70 is going to provide the points out on the efficient frontier. That was not something included in the current article. But Social Security provides the best annuity available on the market, and delaying is quite worthwhile for anyone interested in using annuities. There might be an occasional scenario where starting Social Security earlier would do better in hindsight due to a large market drop in the intervening years when one is still invested in the market, but generally speaking delaying Social Security will be part of a most efficient strategy. I will try to model this more formally to make sure it's right, but I'm pretty sure that this is going to work.

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  2. Sort of a side question, I guess, but in terms of annuity safety: I get the need to diversify across issuers if one is concerned about issuer-risk, but how safe are SPIA's if the underlying asset-classes have major periods of underperformance? Given the major mistakes that big insurance companies have made in recent years in their projections on diasbility and LTC insurance, I am not necessarily confident in their actuatial prowess.

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