tag:blogger.com,1999:blog-6167053228142922997.post8263921156738174873..comments2023-10-30T11:57:40.433-04:00Comments on Wade Pfau's Retirement Researcher Blog: Choosing a Retirement Income StrategyAnonymoushttp://www.blogger.com/profile/04168922717655562721noreply@blogger.comBlogger14125tag:blogger.com,1999:blog-6167053228142922997.post-7152068678694539512012-04-30T23:12:06.385-04:002012-04-30T23:12:06.385-04:00Thank you John. I do have fixed annuities and GLWB...Thank you John. I do have fixed annuities and GLWBs programmed in now, and it is just a matter of time before I get around to writing up some results. It is nice to receive input from an actuary. Joe Tomlinson also visits here a lot. I'm definitely a very amateur actuary.<br /><br />About your question, I do think I am doing what you are suggesting, though I'm not positive. The denominator is just the sum of survival probabilities to each age, with no further discount factor included. So I think that is implicitly discounting with a zero real rate of return. <br /><br />I've also been looking at not multiplying by survival rates, but instead looking at the sum of real deviations over a given time, such as 30 years, without any further discounting. <br /><br />Thanks, WadeAnonymoushttps://www.blogger.com/profile/04168922717655562721noreply@blogger.comtag:blogger.com,1999:blog-6167053228142922997.post-49316329102364309902012-04-30T23:05:58.828-04:002012-04-30T23:05:58.828-04:00This does sound like more realistic behavior, but ...This does sound like more realistic behavior, but it might not end up changing the results all that much. Spending more one year but offsetting that with less the next year, and so on, might expose you a bit more to sequence of returns risk, but it is probably going to be hard to see much difference in the performance measures. But I'll keep this in mind, thank you.Anonymoushttps://www.blogger.com/profile/04168922717655562721noreply@blogger.comtag:blogger.com,1999:blog-6167053228142922997.post-69285635101151041582012-04-30T23:02:57.933-04:002012-04-30T23:02:57.933-04:00Thanks. Yes, what you are describing I will also ...Thanks. Yes, what you are describing I will also like to consider, but I need to add forecasts for interest rates to be able to do it. This sounds a lot like the Russell Investments Personal Asset Liability Model that I described a while back. I think this has a lot of potential.<br /><br /><a href="http://wpfau.blogspot.jp/2012/04/russell-investments-personal-asset.html" rel="nofollow">http://wpfau.blogspot.jp/2012/04/russell-investments-personal-asset.html</a>Anonymoushttps://www.blogger.com/profile/04168922717655562721noreply@blogger.comtag:blogger.com,1999:blog-6167053228142922997.post-18567546418038123132012-04-28T12:41:58.227-04:002012-04-28T12:41:58.227-04:00What I had in mind was periodic, larger withdrawal...What I had in mind was periodic, larger withdrawals, with the money staying invested meanwhile. Every N years, take out N*X percent or dollars. For things like a new car or a new kitchen, people might not find it too difficult to delay the expenditure until the Nth year.<br /><br />I'm probably overlooking some vital complexity, but the calculations for this approach might be simple. Would it work to set the withdrawal rate to the cummulative periodic rate - X^(1+N) - but make the statement which subtracts from the portfolio value check whether the year of retirement is divisble by N and only do the subtraction if it is? The calculations would be similar for constant dollar withdrawals.<br /><br />I speculate that the benefit of this kind of periodic withdrawal might be sensitive to asset allocation, with riskier portfolios benefiting more.<br /><br />Yes, I read the Bogleheads forum and occasionally post there; I learn a great deal from my posts getting shot down.ourbrooksnoreply@blogger.comtag:blogger.com,1999:blog-6167053228142922997.post-36962501638531570892012-04-28T10:52:38.964-04:002012-04-28T10:52:38.964-04:00I have been thinkink along similar lines. One pos...I have been thinkink along similar lines. One possibility would be for the retiree to buy an inflation-adjusted annuity paying 3 yearly at the beginning of retirement and then draw down the remaining money according to her lifespan. That's relatively simple to implement. Here's something a bit more difficult to implement, but that may be less conservative. Given a floor of 3, set a trigger point 10-15% higher. (I'm guessing at an amount; simulation would help.) Say we set it at 3.4. Then withdraw your constant 5% but the first year your withdrawal drops below 3.4, the trigger point, buy an inflation adjusted annuity for 3 (or as much as you can get). Because the annuity comes later, there will be more generous mortality credits and it is very unlikely that there won't be enough money to ensure an income of 3. You could even set the trigger at 3, but that might leave you short if you have a withdrawal of, say, 3.01 and then a big drop. Note that although these plans help with the downside, there should also be some way to harvest excess if the weath does extremely well. I haven't given much thought to that yet. Presumably, a 5% harvest rate is too low when a 20 year life span is no longer possible.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-6167053228142922997.post-23673022733733467422012-04-28T10:16:03.886-04:002012-04-28T10:16:03.886-04:00Interesting stuff. Thank you for sharing. The fir...Interesting stuff. Thank you for sharing. The first part requires more thought, but I would like to mostly focus on your last points with regard to using mortality data vs. planning for a fixed horizon.<br /><br />Actually, you've inspired me to write my newest blog entry on this subject. Thanks!<br /><br /><a href="http://wpfau.blogspot.jp/2012/04/fixed-time-horizons-vs-survival.html" rel="nofollow">http://wpfau.blogspot.jp/2012/04/fixed-time-horizons-vs-survival.html</a>Anonymoushttps://www.blogger.com/profile/04168922717655562721noreply@blogger.comtag:blogger.com,1999:blog-6167053228142922997.post-13065063989231548082012-04-28T10:01:08.530-04:002012-04-28T10:01:08.530-04:00Wade - thanks for the thoughtful analysis. Consid...Wade - thanks for the thoughtful analysis. Considering a proportional approach to withdrawals is really important, because it is more in line with actual behavior. People will spending more when they are ahead, and spend less when they are behind. As suggested by others, it would be really helpful if you considered expanding the universe of financing instruments to include immediate annuities - I think you will find that the results will be significantly better due to the mortality leverage that they provide. If you use a fixed immediate annuity, you can probably increase the % of the residual portfolio into stocks. In the analysis that I have done (I am a credentialed actuary), variable immediate annuities perform exceptionally well.<br /><br />One other point/question - I was not entirely clear on how you calculated the deviation amounts for when the income levels dropped below 3. I am glad that you weighted this for survivorship, but was not clear on whether you reflected this in your denominator when you converted these amounts into a percentage. I would suggest that this best be done with a denominator that is essentially equal to an annuity value that pays 3 per year with an interest rate of zero - as this is what would be a successful, survivorship-adjusted outcome.JohnBevacquahttps://www.blogger.com/profile/08542373650776932426noreply@blogger.comtag:blogger.com,1999:blog-6167053228142922997.post-14784954840676498912012-04-28T09:58:05.374-04:002012-04-28T09:58:05.374-04:00That is pretty interesting, though it sounds tough...That is pretty interesting, though it sounds tough to model. Because ultimately you will still withdraw some amount each year. What types of assumptions would you add to deal with this? <br /><br />More generally, one important point is that with any of these strategies you wouldn't necessarily need to withdraw the full amount in a given year if you happen not to need it. That would help sustainability, and in the context of the "value of spending" framework, it would just mean that the value of additional spending is zero so there is no need to spend it.<br /><br />ourbrooks, I think you are a Boglehead, right, and in the Bogleheads thread about the Scott Burns column, a lot of people were commenting that you shouldn't be required to withdraw more than you need. Of course not, and that fits fully into the framework when you define the "value" provided by additional spending.Anonymoushttps://www.blogger.com/profile/04168922717655562721noreply@blogger.comtag:blogger.com,1999:blog-6167053228142922997.post-48144790357721824582012-04-28T09:57:29.814-04:002012-04-28T09:57:29.814-04:00es, good points. About the returns, I could show t...es, good points. About the returns, I could show those as well, but I think there may already be information overload. Especially as this showed just one simulation, but mostly I will be focusing on the results from many simulations. <br /> <br />Your second point is particularly important. I've been looking at 3 different ways to deal with this: (1) a strategy in which the withdrawal rate is 1 divided by remaining life expectancy instead of always a fixed withdrawal rate, (2) buying a real SPIA to guarantee that spending will not drop below the minimum income floor, and (3) including a floor with the constant percentage withdrawals so that spending doesn't drop below the floor (unless wealth runs out). Any other ideas about this? Please stay tuned, I'm developing a lot more results to share.Anonymoushttps://www.blogger.com/profile/04168922717655562721noreply@blogger.comtag:blogger.com,1999:blog-6167053228142922997.post-38749035814030544142012-04-28T09:56:49.422-04:002012-04-28T09:56:49.422-04:00This is an important question of course. The purpo...This is an important question of course. The purpose of that blog post was to provide more in depth explanations about the different types of measures which can be used to compare retirement income strategies. I've been doing a lot of programming in the past week and I will indeed by discussing this in much greater detail.Anonymoushttps://www.blogger.com/profile/04168922717655562721noreply@blogger.comtag:blogger.com,1999:blog-6167053228142922997.post-31170970060201049932012-04-27T18:02:52.558-04:002012-04-27T18:02:52.558-04:00Variable Withdrawals: With regards to the stock po...Variable Withdrawals: With regards to the stock portion of the portfolio one can do a) reverse dollar cost averaging (constant real withdrawals), b) dollar cost averaging (constant proportional withdrawals), or c) a sell high strategy (higher proportional withdrawal rate when real portfolio value increases or alternatively when PE10 is high, dividends only withdrawals when prices are low). Common sense and analysis of sequences of returns from 1926-2010 indicate that mean returns, maximum returns, and variability of returns all increase in the order of a, b, c. This makes financial sense as a constant real withdrawal rate is essentially a sell low strategy (more shares are sold in years when the market is down).<br />With variable withdrawals one wouldn’t typically spend all the extra income during market peaks but rather pay down debts, add an aliquot of annuity, or stash it in a money market/short term bond fund/TIPS. This way the larger withdrawals during market peaks support later expenses.<br />The question is: Can the extra anticipated average income from avoiding reverse dollar cost averaging (strategies b or c) be harnessed to provide a suitably stable and perhaps higher retirement income? <br />One way that may work is to initially purchase a nominal annuity and then add to it when the portfolio does well (inflation and good luck adjustments). The nominal annuity allows initial income to be high without using the entire portfolio. <br />Utility Function: Death is inevitable and one can approximate death probabilities. However, for an individual, it is prudent to always plan for living much longer than anticipated and never plan to fully go broke. The utility question should be: what is the highest spending rate that can be sustained for a period much longer than one can reasonably be expected to live. Actuarial calculations are for companies and governments that can account for real longevities. Individuals use maximum potential lifetime. Most people will estimate maximum potential lifetime as: (age at death of longest lived close relative + 10 or more years for improved medicine). For this reason safe withdrawal periods of various lengths (20 yr, 30 yr, 40 yr) are more useful to individuals than a mortality weighted utility function.Johnhttps://www.blogger.com/profile/05844362968511348790noreply@blogger.comtag:blogger.com,1999:blog-6167053228142922997.post-87735596931098218582012-04-27T17:12:47.736-04:002012-04-27T17:12:47.736-04:00In some respects, looking at any withdrawal strate...In some respects, looking at any withdrawal strategy with the word, "constant," in it is fighting the last war. Suppose I follow the sensible advice to build an income floor with pensions, annuities, and Social Security. For my optional expenditures, I'm highly unlikely to withdraw at any kind of regular pace; I'm probably not going to need or want a new car or boat or new kitchen every year.<br /><br />What this suggests is that rather than looking at annual withdrawals, it might make more sense to look at withdrawals over a longer interval; rather than an inflation adjusted 5% each year, how about a 15% withdrawal every three years or 25% every five years? I'm guessing that, by effectively averaging returns, that kind of strategy would support higher withdrawal rates, as well as providing a better match to actual spending patterns.ourbrooksnoreply@blogger.comtag:blogger.com,1999:blog-6167053228142922997.post-54976033421383499472012-04-27T15:44:52.382-04:002012-04-27T15:44:52.382-04:00Two comments: First, it would be helpful to have ...Two comments: First, it would be helpful to have a column for yearly investment return so the reader can see the pattern. It is possible to reverse engineer it, but that's unnecessary work when you must already have it. Second, to me one of the most obvious lessons is that one MUST rethink the withdrawal rule periodically. Unless this retiree has a very strong bequest motive (not suggested anywhere), at age 88, with over 50 units of wealth left, why should she let her withdrawals drop below her goal of 3? She has enough for 17 more years at that rate, so it would last until she is 105. Yes, that is too simplistic because she doesn't know future returns, but still ... Or at age 100, she takes only 1.5 from a portfolio of 30 that would supply her minimum goal of 3 for 10 more years?Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-6167053228142922997.post-64286792405773514862012-04-27T12:12:31.924-04:002012-04-27T12:12:31.924-04:00Great info as always. It seems that 5%, either fix...Great info as always. It seems that 5%, either fixed or inflation adjusted, is a bit higher then what is usually recommended. I am curious how the results would change if a more typical withdrawal rate of 4% was used for the comparison of fixed % vs. inflation adjusted.Anonymousnoreply@blogger.com