tag:blogger.com,1999:blog-61670532281429229972024-03-05T02:58:34.573-05:00Wade Pfau's Retirement Researcher Blogproviding independent, data-driven, and research-based information about retirement planning...Anonymoushttp://www.blogger.com/profile/04168922717655562721noreply@blogger.comBlogger307125tag:blogger.com,1999:blog-6167053228142922997.post-86669675729574269352015-02-09T14:00:00.000-05:002015-02-09T14:00:03.665-05:00Blog is Moving to RetirementResearcher.com; Please Re-Suscribe via Email<span style="font-size: small;"><span style="font-family: Verdana,sans-serif;">The blog has been quiet for a while, but not because it is going away. Rather, I've been receiving some great help to set up a new and improved website and blog at <a href="http://www.retirementresearcher.com/">www.RetirementResearcher.com</a></span></span><br />
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<span style="font-size: small;"><span style="font-family: Verdana,sans-serif;">The new website is now up and running, and soon all the links on this blog will be redirected to their new permanent homes. My blog continues over there, and there will be lots of new features on the website as well.</span></span><br />
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<span style="font-size: small;"><span style="font-family: Verdana,sans-serif;">Thank you for everyone who's been a part of the growth of the Retirement Researcher blog thus far. There are over 2,000 e-mail subscribers already. As a part of transitioning to the new website, I do have to request that everyone interested to continue receiving the blog posts and other information by e-mail, to please resubscribe. I'm not going to be able to carry over the old subscription list. <a href="http://retirementresearcher.com/definition-subscription/?utm_referrer=http%3A%2F%2Fretirementresearcher.com%2F" target="_blank">This link</a> will get you to the resubscription page. When subscribing, the page asks whether or not you are a financial advisor. Either answer is okay, as this question is used to help direct more relevant information for different readers.</span></span><br />
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<span style="font-size: small;"><span style="font-family: Verdana,sans-serif;">This is an ongoing issue of balance I am working with, as it may not be so common to have a readership which is quite evenly divided between financial advisors serving retirees, as well as individual investors planning toward their own retirements.</span></span><br />
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<span style="font-size: small;"><span style="font-family: Verdana,sans-serif;">In addition to being the new home for the blog, RetirementResearcher.com also have some other new features. First and foremost is the <a href="http://retirementresearcher.com/dashboard/" target="_blank">Retirement Dashboard</a>. It provides an up-to-date assessment about the costs of retiring today and what type of spending a typical saver could be expected to sustain when retiring at the present. Though I haven't started actively trying to promote the new dashboard, opportunities already came up for me to write about it at <i><a href="http://www.investmentnews.com/article/20150116/BLOG09/150119942/why-security-in-retirement-is-often-luck-of-the-draw" target="_blank">InvestmentNews</a></i> and the <a href="http://blogs.wsj.com/experts/2015/01/20/how-much-can-you-safely-spend-in-retirement/" target="_blank"><i>Wall Street Journal</i> website</a>. I also have two detailed explanations (<a href="http://www.advisorperspectives.com/newsletters15/Introducing_the_Retirement_Wealth_and_Affordability_Indices.php" target="_blank">article #1</a> and <a href="http://www.advisorperspectives.com/newsletters15/Introducing_the_Retirement_Dashboard.php" target="_blank">article #2</a>) about the dashboard methodology at <i>Advisor Perspectives</i>.</span></span><br />
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<span style="font-size: small;"><span style="font-family: Verdana,sans-serif;">I'm hoping it will create a lot of interest as a one stop location which summarizes sustainable spending with the whole range of possible retirement income strategies from across the spectrum using both dedicated income sources and volatile investment portfolios.</span></span><br />
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<span style="font-size: small;"><span style="font-family: Verdana,sans-serif;">I've also made a new and improved <a href="http://retirementresearcher.com/reading/" target="_blank">"Reading" page</a> with links to my research articles and lots of good books on retirement income planning.</span></span><br />
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<span style="font-size: small;"><span style="font-family: Verdana,sans-serif;">On the <a href="http://retirementresearcher.com/" target="_blank">main homepage</a> of the new website, you can also find 3 PDF e-books with "best of" content from the more than 300 blog posts I've already written. </span></span><br />
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<span style="font-size: small;"><span style="font-family: Verdana,sans-serif;">Finally, longtime readers who are thinking in terms of their own retirements may like to have a look at the <a href="http://retirementresearcher.com/retirement-readiness-review/?&__hssc=&__hstc=226167941.24ead2cf991761013068d024264da340.1419953617017.1420821888370.1420825170028.24&hsCtaTracking=dc76881d-8f5f-4263-b886-225951e00141|407ba750-dc70-4eb9-9fa6-0f7f33e1e06f" target="_blank">Retirement Readiness Review</a> options now available. I'm working as Director of Retirement Research with McLean Asset Management to help build this one-time checkup opportunity for those who want to make sure that they're on the right track for meeting their retirement goals.</span></span><br />
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<span style="font-size: small;"><span style="font-family: Verdana,sans-serif;">Thank you again for reading the blog and I hope to see you at the new and improved <a href="http://retirementresearcher.com/blog/" target="_blank">Retirement Researcher blog</a>.</span></span><br />
<br />Anonymoushttp://www.blogger.com/profile/04168922717655562721noreply@blogger.com1tag:blogger.com,1999:blog-6167053228142922997.post-79848761571718424962014-12-03T14:13:00.000-05:002014-12-03T14:13:53.721-05:00Rising Glidepaths and Liability-Matching Portfolios<span style="font-size: small;"><span style="font-family: Verdana,sans-serif;">This week in the <i>Wall Street Journal</i>'s Encore Report section, I have short pieces about <a href="http://blogs.wsj.com/experts/2014/12/01/the-case-for-reverse-mortgages/" target="_blank">reverse mortgages</a> and <a href="http://blogs.wsj.com/experts/2014/12/02/in-2015-figure-out-how-much-you-spent-in-2014/" target="_blank">budgeting in retirement</a>. </span></span><br />
<span style="font-size: small;"><span style="font-family: Verdana,sans-serif;"><br /></span></span>
<span style="font-size: small;"><span style="font-family: Verdana,sans-serif;">Also, on Monday, William Bernstein published an article in the </span></span><span style="font-size: small;"><span style="font-family: Verdana,sans-serif;"><span style="font-size: small;"><span style="font-family: Verdana,sans-serif;"><i>Wall Street Journal</i></span></span> called, <a href="http://online.wsj.com/articles/how-to-think-about-risk-in-retirement-1417408070" target="_blank">"How to Think About Risk in Retirement,"</a> in which he discusses rising equity glidepaths in retirement, and cites the <a href="http://wpfau.blogspot.com/2013/09/reducing-retirement-risk-with-rising.html" target="_blank">rising equity glidepath</a> article I wrote with Michael Kitces.</span></span><br />
<span style="font-size: small;"><span style="font-family: Verdana,sans-serif;"><br /></span></span>
<span style="font-size: small;"><span style="font-family: Verdana,sans-serif;">His column ends with:</span></span><br />
<span style="font-size: small;"><span style="font-family: Verdana,sans-serif;"></span></span><br />
<blockquote class="tr_bq">
<span style="font-size: small;"><span style="font-family: Verdana,sans-serif;"><i>Reverse glide path or two-bucket LMP/RP strategy? You say tuh-may-toe, I
say tuh-mah-toe. Either approach will do a superb job of minimizing
your risk of dying poor.</i></span></span></blockquote>
<span style="font-size: small;"><span style="font-family: Verdana,sans-serif;">I like this quote, because for me it represents the distinction between <a href="http://wpfau.blogspot.com/2014/11/the-yin-and-yang-of-retirement-income.html" target="_blank">probability-based and safety-first approaches</a> to retirement income planning. In <a href="http://www.onefpa.org/journal/Pages/Reducing%20Retirement%20Risk%20with%20a%20Rising%20Equity%20Glide%20Path.aspx" target="_blank">the research article</a>, Michael and I discussed rising equity glidepaths in the context of being a probability-based approach.</span></span><br />
<br />
<span style="font-size: small;"><span style="font-family: Verdana,sans-serif;">But in presentations I've done, I generally discuss the strategy as more of a safety-first approach. That is how William Bernstein eloquently describes the strategy in his column. This is what he means by the term "liability-matching portfolio." Safer assets (individual bonds or income annuities) are matched to specific retirement spending needs, and then the remaining discretionary wealth can be invested more aggressively in a "risk portfolio." That's the LMP/RP in the quote.</span></span><br />
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<span style="font-size: small;"><span style="font-family: Verdana,sans-serif;">As you progress through retirement using a relatively conservative spending strategy, you are generally going to find, if stocks can enjoy some growth, that the percentage of remaining assets required to cover remaining spending needs is going to decline over time.</span></span><br />
<br />
<span style="font-size: small;"><span style="font-family: Verdana,sans-serif;">Actually, Michael and I wrote the "probability-based" article after first observing this sort of phenomenon in a "safety-first" article. (I should note that these opinions are mine, as Michael thinks the distinction between these two schools of thought is artificial and would probably not explain our research in the same way as I currently am). </span></span><br />
<br />
<span style="font-size: small;"><span style="font-family: Verdana,sans-serif;">We had observed in <a href="http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2296867" target="_blank">an earlier article</a> that if you put half of your assets into an income annuity at retirement, and the other half into stocks, and then you treat the present value of remaining annuity payments as a type of fixed income asset when measuring overall household wealth, your equity allocation will generally rise throughout retirement:</span></span><br />
<span style="font-size: small;"><span style="font-family: Verdana,sans-serif;"> </span></span><br />
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<span style="font-size: small;"><span style="font-family: Verdana,sans-serif;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEh2iOnXy1WVw5nC6knvzso3VGvEE66CJgkFkC_BlJVPLnV-aByJlvWO_-Q_kB7IxO90P1OqFNy6wN9ddL1U5Ixwj_kZhUykCrKVSBXrKeAGQvEh8GcU85k5400pFWrm46SkdNH4oXJ3qeA/s1600/RisingGlidepath.JPG" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEh2iOnXy1WVw5nC6knvzso3VGvEE66CJgkFkC_BlJVPLnV-aByJlvWO_-Q_kB7IxO90P1OqFNy6wN9ddL1U5Ixwj_kZhUykCrKVSBXrKeAGQvEh8GcU85k5400pFWrm46SkdNH4oXJ3qeA/s1600/RisingGlidepath.JPG" height="434" width="640" /></a></span></span></div>
<br />
<span style="font-size: x-small;"><span style="font-family: Verdana,sans-serif;">Source: Kitces and Pfau, <a href="http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2296867" target="_blank">"The True Impact of Immediate Annuities on Retirement Sustainability: A Total Wealth Perspective"</a></span></span><br />
<span style="font-size: small;"><span style="font-family: Verdana,sans-serif;"><br /></span></span>
<span style="font-size: small;"><span style="font-family: Verdana,sans-serif;">This is why I'm generally confident in the idea that rising glidepaths are justifiable. It can be explained either as (1) a risk management tool to get the same or slightly improved outcomes with a lower lifetime stock allocation using a probability-based approach, or as (2) the natural outcome of someone basing asset allocation on their funded status and devoting the necessarily percentage of their assets to safer assets covering their spending needs, and the rest of their discretionary wealth to more risky assets. Tuh-may-toe or tuh-mah-toe.</span></span><br />
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<span style="font-size: small;"><span style="font-family: Verdana,sans-serif;"> </span></span>Anonymoushttp://www.blogger.com/profile/04168922717655562721noreply@blogger.com17tag:blogger.com,1999:blog-6167053228142922997.post-82826678084649857862014-11-20T22:57:00.001-05:002014-11-20T22:57:21.454-05:00MarketWatch Panel Discussion with Bob Powell, Dirk Cotton, and Joe Tomlinson<span style="font-family: Verdana, sans-serif;">In October, Dirk Cotton, Joe Tomlinson, and I joined Bob Powell in New York City for a panel discussion about retirement income.</span><br />
<span style="font-family: Verdana, sans-serif;"><br /></span>
<span style="font-family: Verdana, sans-serif;">The end results are now available online. The MarketWatch Team produced four columns about the discussion, and there are short video segments interspersed throughout:</span><br />
<span style="font-family: Verdana, sans-serif;"><br /></span>
<span style="font-family: Verdana, sans-serif;">Robert Powell: <a href="http://www.marketwatch.com/story/loading-up-on-stocks-after-you-retire-2014-11-20?dist=retirementadviser" target="_blank">Loading up on Stocks -- After you Retire</a></span><br />
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<span style="font-family: Verdana, sans-serif;">Elizabeth O'Brien: <a href="http://www.marketwatch.com/story/do-you-need-a-safety-first-retirement-plan-2014-11-20?dist=retirementadviser" target="_blank">Do You Need a 'Safety-First' Retirement Plan?</a></span><br />
<span style="font-family: Verdana, sans-serif;"><br /></span>
<span style="font-family: Verdana, sans-serif;">Robert Powell: <a href="http://www.marketwatch.com/story/is-your-retirement-fully-funded-2014-11-20?dist=retirementadviser" target="_blank">Is Your Retirement 'Fully-Funded'?</a></span><br />
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<span style="font-family: Verdana, sans-serif;">Elizabeth O'Brien: <a href="http://www.marketwatch.com/story/the-retirement-risks-you-cant-predict-2014-11-20?dist=retirementadviser" target="_blank">The Retirement Risks You Can't Predict</a></span><br />
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<span style="font-family: Verdana, sans-serif;">See more at the <a href="http://www.marketwatch.com/retirement-adviser" target="_blank">MarketWatch Retirement Adviser</a> website.</span>Anonymoushttp://www.blogger.com/profile/04168922717655562721noreply@blogger.com5tag:blogger.com,1999:blog-6167053228142922997.post-65078047305530709822014-11-19T17:36:00.000-05:002014-11-19T17:36:13.916-05:00Should I Contribute to a Roth IRA or a Traditional IRA?<span style="font-family: Verdana,sans-serif;">Especially with the growth of Roth 401(k) plans, many retirement savers will confront a decision at the margin about whether to contribute an additional dollar to a Roth account or a tax-deferred account.</span><br />
<br />
<span style="font-family: Verdana,sans-serif;">At a basic level, the answer to this question relates to whether one is taxed at a higher marginal tax rate now compared to when one will be withdrawing these dollars in retirement. If one's marginal tax rate is higher now than in retirement, it is beneficial to contribute to the traditional IRA or 401(k), taking the tax break now, in order to pay lower taxes later in life. </span><br />
<br />
<span style="font-family: Verdana,sans-serif;">However, if the marginal tax rate will be higher in retirement, go ahead and contribute to the Roth account now in order to avoid higher taxes later in life. </span><br />
<br />
<span style="font-family: Verdana,sans-serif;">By this standard, many young people at the start of their career will have lower salaries and be in lower tax brackets relative to later in life and will benefit from contributing to a Roth. Mid-career individuals at peak earnings will be in higher marginal tax brackets and may see more advantage from a traditional tax-deferred approach.</span><br />
<br />
<b><span style="font-family: Verdana,sans-serif;">"Roth IRAs: More Effective (and Popular) Than You Thought" </span></b><br />
<br />
<span style="font-family: Verdana,sans-serif;">This isn't the full story, as a <a href="https://www2.troweprice.com/rms/rps/ElectronicPublishing/pdfs/05820-125_0514_Roth_IRA.pdf" target="_blank">controversial study from T Rowe Price</a> pointed out. Their conclusion was that "most investors should use Roth IRAs over Traditional IRAs." They make this case even if marginal tax rates will be lower in retirement. The argument relates to their table on the first page of their study, which considers an individual who saves $1000 in a Roth IRA vs. saving $1000 in a traditional IRA and another $250 in a taxable account. That additional savings is the result of the $250 in reduced taxes created by making a contribution to the traditional IRA when someone is in the 25% tax bracket. Their point is that taxes will have to be paid over time from the taxable account, reducing the power from tax deferral, and that this gives a much greater edge to the Roth.</span><br />
<span style="font-family: Verdana,sans-serif;"><br /></span>
<span style="font-family: Verdana,sans-serif;">This point is valid, but I think they've really overstated the impact this point has on the final decision. I haven't been able to exactly replicate their study, because they are not clear about some of their assumptions, and because I think they have a really odd way to generate retirement income that results in a rapidly growing spending path over retirement. To replicate their study the best I can with what I think are more reasonable retirement spending assumptions, I assume the following:</span><br />
<br />
<span style="font-family: Verdana,sans-serif;"><b>Roth IRA:</b> Invest $1000 per year until age 65, which grows at 7%. Then for each year of a 30-year retirement, spend a fixed amount each year so that the account balance falls to $0 in year 30, assuming a 6% return. [with a fixed 6% return and withdrawals taken at the start of the year, the sustainable withdrawal rate for 30 years is 6.85%]</span><br />
<br />
<span style="font-family: Verdana,sans-serif;"><b>Traditional IRA:</b> Invest $1000 per year until age 65, which grows at 7%. Then for each
year of a 30-year retirement, spend a fixed amount each year so that the
account balance falls to $0 in year 30, assuming a 6% return. The post-retirement tax rate is applied to these withdrawals, reducing the spendable income accordingly. (RMDs are not considered)</span><br />
<span style="font-family: Verdana,sans-serif;"><br /></span>
<span style="font-family: Verdana,sans-serif;"><b>Taxable Account:</b> Invest $250 per year until age 65, which grows at
(1-.25)*7% = 5.25%. Then for each
year of a 30-year retirement, spend a fixed amount each year so that the
account balance falls to $0 in year 30, assuming a
(1- retirement tax rate)*6% return. </span><br />
<br />
<span style="font-family: Verdana,sans-serif;">In all cases, I assume new contributions are added at the end of the year, and withdrawals are taken at the start of the year. </span><br />
<span style="font-family: Verdana,sans-serif;"> </span><br />
<span style="font-family: Verdana,sans-serif;">With these assumptions, I created the following version of their table:</span><br />
<br />
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhEspjObz6_c_UfoNk35SPvYZEdH6FvJqfZrYN4WGPAgo6V-oC9InHMCBjABuscWX1iPb5XgOkwCaxlFNkUZDQVVXCLL-NwnV-RD5bdLPTy9wQSuQvISkkav8HgpK69AdSQBBF08dbHf2g/s1600/RothIRA.JPG" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhEspjObz6_c_UfoNk35SPvYZEdH6FvJqfZrYN4WGPAgo6V-oC9InHMCBjABuscWX1iPb5XgOkwCaxlFNkUZDQVVXCLL-NwnV-RD5bdLPTy9wQSuQvISkkav8HgpK69AdSQBBF08dbHf2g/s1600/RothIRA.JPG" height="492" width="640" /></a></div>
<br />
<br />
<span style="font-family: Verdana,sans-serif;">Now, as I note in the table, these are still <u>extreme upper bounds</u> about the relative benefits of the Roth IRA created by the tax issue for the taxable account. Why? </span><br />
<br />
<span style="font-family: Verdana,sans-serif;">First, the assumed returns are rather high. Based on the fact that someone is saving $1000 every year over a potentially long-career, we've got to assume these are compounded real returns, which essentially means that this person is investing in 100% stocks and getting the average historical return (which is about 6.5% since 1926). A more diversified portfolio with a lower stock allocation will lower these returns, and a lower return </span><span style="font-family: Verdana,sans-serif;"><span style="font-family: Verdana,sans-serif;">accordingly </span>reduces the relative benefits of the Roth.</span><br />
<br />
<span style="font-family: Verdana,sans-serif;">Second, the rather basic assumption about the taxes being applied to the taxable account is not appropriate. It assumes all portfolio growth is taxed each year at the marginal income tax rate. This ignores the fact that capital gains taxes are deferred until when withdrawals are taken, and that long-term capital gains can be taxed at a lower rate. A more realistic assumption about how taxes will affect the taxable account would lower the taxes being paid each year, and therefore reduce the relative benefits of the Roth.</span><br />
<span style="font-family: Verdana,sans-serif;"><br /></span>
<span style="font-family: Verdana,sans-serif;">Third, and this is a matter I want to discuss more in a subsequent post, regards if one is making charitable contributions over time. Donor-Advised Funds provide a way to contribute appreciated shares from your taxable account, which then basically let's you reset the cost basis of your account by contributing shares to charity rather than cash, but using that cash to replenish the shares just given away at a new higher cost basis. This reduces the disadvantages of having assets in taxable accounts.</span><br />
<br />
<span style="font-family: Verdana,sans-serif;">Fourth, the study is completely ignoring the possibility of making Roth conversions at low marginal tax rates in years when income is low. This is a way to get the tax rate paid on those dollars to be much lower than otherwise, making it realistic to assume lower "post-retirement" tax rates to a degree that could make the traditional IRA look quite attractive. </span><br />
<span style="font-family: Verdana,sans-serif;"><br /></span>
<span style="font-family: Verdana,sans-serif;"><b>Other Factors Which Favor Roth Accounts</b></span><br />
<span style="font-family: Verdana,sans-serif;"><br /></span>
<ul>
<li><span style="font-family: Verdana,sans-serif;">Roth accounts do have extra flexibility in retirement, since withdrawals do not show up on tax forms. By using Roth distributions strategically, it could help to avoid paying taxes on Social Security income, capital gains, Medicare premiums, etc., in retirement.</span></li>
<li><span style="font-family: Verdana,sans-serif;">Roth accounts are not impacted by RMDs. With tax-deferred accounts, RMDs will give you less control about when you have to pay taxes, and these RMDs could result in higher taxes on other income sources as they push up your AGI. </span></li>
<li><span style="font-family: Verdana,sans-serif;">If the government raises tax rates in the future, this would benefit those who have already paid their taxes in advance with the Roth.</span></li>
</ul>
<span style="font-family: Verdana,sans-serif;"><br /></span>
<span style="font-family: Verdana,sans-serif;"><b>Other Factors Which Favor Tax-Deferred Accounts</b></span><br />
<span style="font-family: Verdana,sans-serif;"><br /></span>
<ul>
<li><span style="font-family: Verdana,sans-serif;">The potential value from making Roth conversions cannot be overlooked. Suppose you retire at 62 and delay taking Social Security to 70. This provides 8 years to get extreme about moving lots of assets from a tax-deferred account to a Roth account at 10% or 15% marginal tax rates. </span></li>
<li><span style="font-family: Verdana,sans-serif;">Retirees who are not extremely wealthy will probably be in a lower tax bracket once they stop working. This favors the tax-deferred approach. </span></li>
<li><span style="font-family: Verdana,sans-serif;">Some folks distrust the government to the point that they seek to take any tax breaks when they can, as who knows what tax changes will happen in the future. Some of the benefits of Roths (such as not having RMDs or not being counted in the provisional income which determines whether Social Security benefits are taxed) could be eliminated one day. Of course, this sort of distrust could extend to an assumption that taxes will be higher in the future, which leans toward a Roth.</span></li>
</ul>
<span style="font-family: Verdana,sans-serif;"><br /></span>
<span style="font-family: Verdana,sans-serif;"><b>Conclusions</b></span><br />
<span style="font-family: Verdana,sans-serif;"><br /></span>
<span style="font-family: Verdana,sans-serif;">When I first read the T Rowe Price study, it got me really thinking about whether I may be making a mistake about how I'm managing my divisions between tax-deferred and Roth accounts. But in the end, I think I'm making the right decision. Tax diversification is important, and so it is good to have some funds in tax-deferred accounts and some in Roth accounts. I don't think there is a strong reason to shift completely over to the Roth account, to the extent it is even possible. Nonetheless, as my career progresses I will keep this issue in mind more, as there may be a point where a bigger allocation to Roths could make sense. </span><br />
<span style="font-family: Verdana,sans-serif;"><br /></span>Anonymoushttp://www.blogger.com/profile/04168922717655562721noreply@blogger.com16tag:blogger.com,1999:blog-6167053228142922997.post-77330999262877905142014-11-10T08:06:00.000-05:002014-11-10T08:06:31.594-05:00The Yin and Yang of Retirement Income Philosophies<span style="font-family: Verdana, sans-serif;">I have a new paper available, written with Jeremy Cooper for Challenger in Australia. This paper, <a href="http://www.republicast.com/publications/6a490775ca994e50a54ca9ac68b550c3/#p=1&c=0&v=1" target="_blank">"The Yin and Yang of Retirement Income Philosophies,"</a> reviews what I've been called the probability-based and safety-first schools of thought for retirement income. That link provides the paper in an interaction web format, and for those preferring a PDF file, a link to the PDF version can be found in the lower left-hand corner of the screen. </span><br />
<span style="font-family: Verdana, sans-serif;"><br /></span>
<span style="font-family: Verdana, sans-serif;">After providing an overview of each approach, we then develop a spectrum to categorize eight different strategies ranging from one extreme to the other. We provide further explanations about these eight strategies:</span><br />
<span style="font-family: Verdana, sans-serif;"><br /></span>
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjwupqCQgYvXXezOGbTs4bocr2YmuxeX1re5a53cADAHO2oZHh_WGH_K10fmMRC2UeSAQg_pOaIRQ-LIHzSD42KMt8Pil8QQ6a4N3BEWP4i6dzWb4lIAvpV8rrA62Wyi3iJ-faPKtxJpMc/s1600/RetirementIncomeSpectrum.JPG" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><span style="font-family: Verdana, sans-serif;"><img border="0" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjwupqCQgYvXXezOGbTs4bocr2YmuxeX1re5a53cADAHO2oZHh_WGH_K10fmMRC2UeSAQg_pOaIRQ-LIHzSD42KMt8Pil8QQ6a4N3BEWP4i6dzWb4lIAvpV8rrA62Wyi3iJ-faPKtxJpMc/s1600/RetirementIncomeSpectrum.JPG" height="536" width="640" /></span></a></div>
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<span style="font-family: Verdana, sans-serif;">Retirement income is becoming a bigger deal all around the world. Australia has been very successful on the accumulation side with the mandatory contributions for their superannuation system. As contributors are now reaching retirement with a big pot of assets, the challenge becomes figuring out how to create a sustainable income for life. Challenger is one of the major financial service companies in Australia. And in a way that's different from the United States, Challenger is active in both investment management and insurance, which can allow them to more easily implement strategies on both sides of the spectrum. Since retirement income is still quite a new concept in Australia, this paper is meant to be educational, clarifying how retirement distribution does indeed require different thinking than pre-retirement wealth accumulation. </span>Anonymoushttp://www.blogger.com/profile/04168922717655562721noreply@blogger.com3tag:blogger.com,1999:blog-6167053228142922997.post-29894926064308127202014-10-31T11:40:00.000-04:002014-10-31T11:40:55.368-04:00Retirement Income from a Position of Strength<span style="font-size: small;"><span style="font-family: Verdana,sans-serif;">A couple quick announcements before today's post:</span></span><br />
<span style="font-size: small;"><span style="font-family: Verdana,sans-serif;"><br /></span></span>
<span style="font-size: small;"><span style="font-family: Verdana,sans-serif;">Yesterday's inStream webinar on "Understanding and Explaining Monte Carlo Simulations" ran into a couple of technical difficulties. The sound was cut off for a couple minutes near the start, and there was supposed to be a 250 person capacity, but people were being locked out after the first 100 arrived. So we are going to have a repeat of the same webinar next Wednesday, November 5, from 2pm to 3pm eastern time. This is the <a href="https://www3.gotomeeting.com/register/299227046" target="_blank">sign-up link</a>. This webinar will be recorded and posted on the <a href="https://app.instreamwealth.com/#/register/step-one" target="_blank">inStream page</a> if you are unable to attend. Though technically meant for financial advisors, anyone is welcome to join.</span></span><br />
<span style="font-size: small;"><span style="font-family: Verdana,sans-serif;"><br /></span></span>
<span style="font-size: small;"><span style="font-family: Verdana,sans-serif;">Next, a couple weeks back, Nobel laureate William Sharpe had a great interview with Bob Huebscher at <i>Advisor Perspectives</i>, mostly about issues related to retirement income. The <a href="http://www.advisorperspectives.com/newsletters14/Bill_Sharpe_on_Retirement_Planning.php" target="_blank">interview transcript</a> is well worth reading. </span></span><br />
<span style="font-size: small;"><span style="font-family: Verdana,sans-serif;"><br /></span></span>
<span style="font-size: small;"><span style="font-family: Verdana,sans-serif;">And now, today's topic. I received the following question at an old blog post:</span></span><br />
<blockquote class="tr_bq">
<span style="font-size: small;"><span style="font-family: Verdana,sans-serif;"><i>I enjoy your blog. Thanks for all the great posts.<br /><br />I enjoy Mr.
Money Mustache's blog as well; I find it very interesting that you do.
Given your academic training and professional experience in the field, I
think it would be very illuminating if you commented on some of his
advice (where you agree or not, and why). The intent is not to create
some kind of MMM vs. Wade Pfau battle but to gain some interesting
perspectives on retirement (particularly of the early variety) from two
different angles.</i></span></span></blockquote>
<span style="font-size: small;"><span style="font-family: Verdana,sans-serif;"></span></span><br />
<span style="font-size: small;"><span style="font-family: Verdana,sans-serif;">There's no rivalry. I think I can guess why some readers might think there is a rivalry, and I'll comment on that. But then I'll explain why it's not an issue in this case.</span></span><br />
<span style="font-size: small;"><span style="font-family: Verdana,sans-serif;"><br /></span></span>
<span style="font-size: small;"><span style="font-family: Verdana,sans-serif;">I really enjoy Mr. Money Mustache's blog. His blog introduced me to Republic Wireless and FreedomPop, and those two services alone are saving me a couple hundred dollars a month on cell and internet bills. As well, his recent post about credit card churning gave me the push toward finally doing that in a more organized and systematic fashion than I had been in the past. Though I'm not as frugal as he is, and I'm not so handy around the house such that I can't build my own showers and things, I do definitely identify with his anti-consumerism views. I do enjoy my job and so I'm not in as big of rush to gain financial independence as some of the extreme early retirees, but I am definitely working toward achieving financial independence at a relatively young age. </span></span><br />
<span style="font-size: small;"><span style="font-family: Verdana,sans-serif;"><br /></span></span>
<span style="font-size: small;"><span style="font-family: Verdana,sans-serif;">I guess the reason why readers might think there is a rivalry is a result of the concerns I have about the 4% rule for retirement income. Mr. Money Mustache <a href="http://www.mrmoneymustache.com/2012/05/29/how-much-do-i-need-for-retirement/" target="_blank">wrote about the 4% rule</a>, linking to a post I had made which describes the rule's origins. I had meant that as an introductory post to explain where the rule came from, and I followed it with a series of posts about real-world concerns over whether retiree's should be relying on the safety of this strategy. In particular, the 4% rule is calibrated to a 30-year retirement, and that is too short of a time horizon for early retirees.</span></span><br />
<span style="font-size: small;"><span style="font-family: Verdana,sans-serif;"><br /></span></span>
<span style="font-size: small;"><span style="font-family: Verdana,sans-serif;">That being said, Mr. Money Mustache is able to approach the matter of sustainable spending with a <a href="http://www.mrmoneymustache.com/2013/11/11/get-rich-with-the-position-of-strength/" target="_blank">Position of Strength</a>, to use his term. This also relates to what <a href="http://www.amazon.com/gp/product/0812979680/ref=as_li_tl?ie=UTF8&camp=1789&creative=390957&creativeASIN=0812979680&linkCode=as2&tag=pensretiplana-20&linkId=R6GZVMNUGSWYIZEY" target="_blank">Nassim Nicholas Taleb calls <i>Antifragility</i></a>. Basically, Mr. Money Mustache has a lot of flexibility. He could cut his spending in half and not experience a significant impact on his standard of living. In fact, he might feel good about that, because it will be a good chance to flex those frugality muscles. If we experience the type of market crash that could derail the traditional 4% rule, Mr. Money Mustache will tighten his belt, rebalance his portfolio, and come out stronger on the other side. He has risk capacity. He can be more aggressive with his spending and investments, as at this point it's all about the upside for charitable spending, etc. He doesn't have to worry about the downside, because his standard of living is immune to the value of his financial portfolio.</span></span><br />
<span style="font-size: small;"><span style="font-family: Verdana,sans-serif;"><br /></span></span>
<span style="font-size: small;"><span style="font-family: Verdana,sans-serif;">And that's why there's no battle here. I'd be the last person to tell Mr. Money Mustache that 4% is too aggressive given his personal circumstances.</span></span><br />
<span style="font-size: small;"><span style="font-family: Verdana,sans-serif;"><br /></span></span>
<span style="font-size: small;"><span style="font-family: Verdana,sans-serif;">That doesn't mean I think the 4% rule is safe. But in the end, it's all about flexibility, and Mr. Money Mustache has loads of flexibility.</span></span><br />
<br />Anonymoushttp://www.blogger.com/profile/04168922717655562721noreply@blogger.com8tag:blogger.com,1999:blog-6167053228142922997.post-22944492583440500422014-10-21T16:49:00.004-04:002014-10-21T16:49:59.746-04:00Webinar: Understanding and Explaining Monte Carlo Results To Your Clients<span style="font-family: Verdana, sans-serif;">Hello from Minneapolis. I presented for 2 hours and 40 minutes today at the FPA Minnesota symposium. I'm heading home now. I was really impressed by the turnout. 600 signed up for the conference, and it seemed like they were almost all there for the early morning session. I'm used to crowds of 100-200 for these sorts of events, so kudos to the FPA Minnesota chapter!</span><br />
<span style="font-family: Verdana, sans-serif;"><br /></span>
<span style="font-family: Verdana, sans-serif;">I will be presenting another webinar open to anyone next Thursday, October 30. It starts at 4pm EDT.</span><br />
<span style="font-family: Verdana, sans-serif;"><br /></span>
<span style="font-family: Verdana, sans-serif;">This webinar will be for inStream solutions, and it will be a more informal type of webinar about how to interpret and use Monte Carlo simulations when working with clients. I will have some slides, but they will be based on a Q&A type of approach, with some questions advisors may have about Monte Carlo, followed by my answers. </span><br />
<span style="font-family: Verdana, sans-serif;"><br /></span>
<span style="font-family: Verdana, sans-serif;">For advisors reading this, Bob Veres also wrote a <a href="http://www.advisorperspectives.com/newsletters14/The_Tool_that_Will_Transform_Firmwide_Financial_Planning.php" target="_blank">very nice article</a> today for <i>Advisor Perspectives</i>, which discusses how larger planning firms are really getting excited about some of the features of inStream, and are using them in a slightly different way than we originally envisioned. I still hope that the "best practices" feature described in the column will ultimately result in some great data to provide a better understanding about how real-world individuals make financial planning decisions over time.</span><br />
<span style="font-family: Verdana, sans-serif;"><br /></span>
<span style="font-family: Verdana, sans-serif;">Here are the webinar details for "Understanding and Explaining Monte Carlo Results To Your Clients":</span><br />
<span style="font-family: Verdana, sans-serif;"><br /></span>
<br />
<div style="background-color: white; color: #777777; font-family: sans-serif; font-size: 15px; line-height: 22.5px; margin-bottom: 1em;">
<strong>You are invited to inStream's latest webinar.</strong></div>
<div style="background-color: white; color: #777777; font-family: sans-serif; font-size: 15px; line-height: 22.5px; margin-bottom: 1em;">
<strong>Please join us for a discussion with <a href="http://info.instreamwealth.com/e1t/c/*N6LDxJ1rlHLwW3TD15g6Pv5_r0/*W7jnhXg3hjMkFW1hK0DC28bDww0/5/f18dQhb0S8388XJ8hgW7m3hvt2qwv27MK73gQ5Z42tMf5wNlXD6prN39Dr-NbHGrBW4th78p8yfjkwW1mZkg96PZxrZW1nrCGw96zRPSW6bT6L38RRjRDW5Ckvpl6vYDb4W7v70tS4RYYVxW3s1XjF51G0BFW4YFc4457-WqMW3H_Pty2DzCtRW1yBQw12cs-TCW8PH8Wj3DJHTGW72lCr557QtftW19L2BP5R57CzVCsYT47NNQM3N1sGq4rMtCKmW91GYzz50hkt5W6rdzdB5RcG6hW5Ywp5q5Zflp4W8m63D571Z9vWW6jS_MQ1SRr7PW7pNjQ55-vLSmW6Pc2NR7PH_qnMwKJnC3qXXRW3n25PN1xb-cJW3fRDy74np9bDW2w8xKK5PkNwpW9dR2h_6HjH0QW4gWgG652gTv9W8szTbb3SYQV2W4py_zV51vZ5mf1tLc_d11" style="color: #1155cc;" target="_blank">Dr. Wade Pfau</a><br /><br />- Learn how to better interpret probability levels of <span class="il" style="background: rgb(255, 255, 204); color: #222222;">Monte</span> <span class="il" style="background: rgb(255, 255, 204); color: #222222;">Carlo</span> simulations. <br /><br />- How to present the results easily<br /><br />- How to explain the effect of different plan variables<br /><br />- Convey what probability of success really means</strong></div>
<div style="background-color: white; color: #777777; font-family: sans-serif; font-size: 15px; line-height: 22.5px; margin-bottom: 1em;">
<strong>Register now</strong></div>
<div style="background-color: white; color: #777777; font-family: sans-serif; font-size: 15px; line-height: 22.5px; margin-bottom: 1em;">
<strong style="font-size: inherit;"><a href="http://info.instreamwealth.com/e1t/c/*N6LDxJ1rlHLwW3TD15g6Pv5_r0/*W4hZv8x4bNvD2N8wLB-G80ZCd0/5/f18dQhb0SmhV8XJ8n0W7m3hvt2qwv27MK73gQ5Z42tMf59TdXD6prW7cmS1s8pCQ7WW4vx1Vr96Lk2XW1nb4Z74vgKM1W97QBxf5DpFRXW2z46B-64zLPTW2m040J1nrCGwW96zRPS6bT6L3W8RRjRD5CkvrlW1fdmZQ1x4lQBW6HdqlT7nwG0kW6bnMRg4NrrFPW7P1-wW33FK-yMqPkxDnjZC8W1FW7Z-8VvbQGW5p2MNy3r3p-hW8h_JN057JytPW2Q2s272N-WfnW7M3HyK8X8NcfW1SfC1T2qD54gVKzyGJ1fQmdzW4bVLzm31TzYgVwd45B7wn3KRW9f4Y157qzvDzW4j9lN42P30r0VtF2bV2p8_TTW7-cq5t3d0zvxW4p7yDT2Bj5ZGN5shX88RHlcxW27K8zM7qtTxcW4J35Sn2N3DcTW7Bq6B-5LdM1VVc6VPk9jzrT7W3M9rxf3FtRSYW3L7Q2t5DTp1Zf8HzMyZ02" style="color: #1155cc;" target="_blank">https://www3.gotomeeting.com/<wbr></wbr>register/785159550</a></strong></div>
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<strong>The inStream team</strong></div>
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<strong><a href="mailto:info@instreamwealth.com" style="color: #1155cc;" target="_blank">info@instreamwealth.com</a></strong></div>
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Anonymoushttp://www.blogger.com/profile/04168922717655562721noreply@blogger.com5tag:blogger.com,1999:blog-6167053228142922997.post-65554959667895559462014-10-15T21:30:00.000-04:002014-10-15T21:30:43.894-04:00Speaking Updates & Ph.D. Fellowship Opportunity at The American College<span style="font-family: Verdana, sans-serif;">I started the day in New York City. This morning I joined Joe Tomlinson and <a href="http://theretirementcafe.blogspot.com/">Dirk Cotton</a> for a MarketWatch panel discussion with Bob Powell. Marketwatch will be producing some stories and videos about that event over the next couple months. As well, Joe, Dirk, and I enjoyed our own little <a href="http://en.wikipedia.org/wiki/Algonquin_Round_Table">Algonquin Round Table</a> at the Algonquin Hotel last night. We had a good discussion about bond ladders for retirement, and came away with some research ideas for comparing bond funds and bond ladders in retirement. </span><br />
<span style="font-family: Verdana, sans-serif;"><br /></span>
<span style="font-family: Verdana, sans-serif;"><b>Academy of Financial Services</b></span><br />
<span style="font-family: Verdana, sans-serif;"><br /></span>
<span style="font-family: Verdana, sans-serif;">The <a href="http://academyfinancial.org/registration/">Annual Meeting for the Academy of Financial Services</a> will be held in Nashville tomorrow and Friday, October 16 & 17. For anyone in Nashville, it looks to be a good event with lots of folks from the retirement income research world. Michael Kitces, David Blanchett, and Joe Tomlinson will all be there, for instance. I'm also filling in as a last minute replacement for Larry Kotlikoff to deliver the luncheon keynote address, and I'll be speaking on "Toward Best Practices in Retirement Income Planning." </span><br />
<span style="font-family: Verdana, sans-serif;"><br /></span>
<span style="font-family: Verdana, sans-serif;">Speaking of research...</span><span style="font-family: Verdana, sans-serif;"><br /></span>
<span style="font-family: Verdana, sans-serif;"><br /></span>
<span style="font-family: Verdana, sans-serif;"><b>Ph.D. Fellowship at The American College</b></span><br />
<span style="font-family: Verdana, sans-serif;"><br /></span>
<span style="font-family: Verdana, sans-serif;">The <a href="http://www.theamericancollege.edu/phd-program">Ph.D. Program in Financial and Retirement Planning</a> is currently progressing along well, with three cohorts of students working their way through the program. This is a distance-based program with live webinar classes and a few one-week residencies. So students are located all over the United States. Thanks to a generous donation from two former executives at New York Life, there is a doctoral fellowship available for a student in the program. The idea for the fellowship is to spend about 20 hours per week conducting research in exchange for program tuition being covered, as well as a $30,000 per year stipend. </span><br />
<span style="font-family: Verdana, sans-serif;"><br /></span>
<span style="font-family: Verdana, sans-serif;">We have been struggling to fill this position, on account that all of the current Ph.D. students also work as full-time financial planners and cannot devote an extra 20 hours per week beyond their already rigorous Ph.D. studies. This fellowship could be attractive to a young person just finishing their bachelors or masters degree in financial planning, and who is ultimately seeking an academic job. Though such an individual might prefer a full-time residency Ph.D. program. Nonetheless, if you fit this description, please do not hesitate to consider The American College along with other more traditional Ph.D. programs at Texas Tech, Georgia, Missouri, or Kansas State.</span><br />
<span style="font-family: Verdana, sans-serif;"><br /></span>
<span style="font-family: Verdana, sans-serif;">A third possibility, and the primary reason I bring this up on my blog, is that the fellowship could be filled by a recent retiree who has time and energy and a passion for research, and who might consider a twilight career at least as a part-time academic. I know some of my blog readers fit into this category, so let me know if you are interested to learn more. Ideally, the doctoral fellow would be someone within commuting distance from Bryn Mawr, PA. But I think we can be flexible about that, as now with tools like Skype or Google Hangout, it is easy interact online almost as easily as in person. The information below also suggests that the fellowship is for someone who can demonstrate financial need. But don't let that stop you from considering this opportunity, as I don't think a lack of financial need would prevent a highly qualified applicant from receiving the award. Please see the announcement below and let me know if you have any interest or questions. </span>
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<strong style="margin: 0px; padding: 0px;">The Sy Sternberg and Fred Sievert Doctoral Fellowship</strong></div>
<strong style="background-color: #eeeeee; color: #311f36; font-family: Tahoma, Geneva, sans-serif; font-size: 13px; line-height: 19.7099990844727px; margin: 0px; padding: 0px;">Overview</strong><span style="background-color: #eeeeee; color: #311f36; font-family: Tahoma, Geneva, sans-serif; font-size: 13px; line-height: 19.7099990844727px;"></span><br />
<div style="background-color: #eeeeee; border: 0px; color: #311f36; font-family: Tahoma, Geneva, sans-serif; font-size: 13px; line-height: 19.7099990844727px; margin-bottom: 20px; padding: 0px; vertical-align: baseline;">
The Sternberg-Sievert Doctoral Fellowship was created to provide financial support to an individual who has both the desire and demonstrated potential to pursue a career in retirement planning research in an academic or industry setting. Funding for the Fellowship is provided by industry trailblazers Sy Sternberg and Fred Sievert who both dedicated years of service to New York Life as Chairman of the Board/CEO and President of the company, respectively.</div>
<strong style="background-color: #eeeeee; color: #311f36; font-family: Tahoma, Geneva, sans-serif; font-size: 13px; line-height: 19.7099990844727px; margin: 0px; padding: 0px;">Description</strong><span style="background-color: #eeeeee; color: #311f36; font-family: Tahoma, Geneva, sans-serif; font-size: 13px; line-height: 19.7099990844727px;"></span><br />
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The Sternberg-Sievert Fellowship includes tuition and fees for the PhD in Financial and Retirement Planning as well as an annual $30,000 stipend for living expenses. The Fellow must be able to work at least 20 hours per week on The American College campus while pursuing the doctorate online. Primary responsibilities of the Fellow include assisting faculty with research projects and providing support to The College’s Centers of Excellence which include the New York Life Center for Retirement Income. In addition, the Sternberg-Sievert Fellow may be required to represent the Fellowship program at donor events and when media opportunities arise.</div>
<strong style="background-color: #eeeeee; color: #311f36; font-family: Tahoma, Geneva, sans-serif; font-size: 13px; line-height: 19.7099990844727px; margin: 0px; padding: 0px;">Eligibility</strong><span style="background-color: #eeeeee; color: #311f36; font-family: Tahoma, Geneva, sans-serif; font-size: 13px; line-height: 19.7099990844727px;"></span><br />
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Applicants must be newly admitted to the doctoral program and be able to demonstrate financial need.<br />
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A master’s degree in finance, economics, consumer science, actuarial science, or related discipline from a regionally accredited institution is required. Residence within commuting distance of The American College’s Bryn Mawr, Pennsylvania campus is highly preferred but not required.<br />
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A demonstrated ability to read and interpret scholarly material is required; the capacity to write for scholarly publications is highly desirable; a background in data collection, data analysis, and/or experience using statistical software packages such as SAS or R is highly preferred.<br />
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Applicants must have a professional appearance and be able to demonstrate fluency in both speaking and writing in the English language.</div>
<strong style="background-color: #eeeeee; color: #311f36; font-family: Tahoma, Geneva, sans-serif; font-size: 13px; line-height: 19.7099990844727px; margin: 0px; padding: 0px;">Funding</strong><span style="background-color: #eeeeee; color: #311f36; font-family: Tahoma, Geneva, sans-serif; font-size: 13px; line-height: 19.7099990844727px;"></span><br />
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Tuition funding and stipend will be renewed annually for up to four years from starting the doctoral program and is contingent on annual satisfactory academic standing and job performance reviews as the Sy Sternberg and Fred Sievert Doctoral Fellow.</div>
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Anonymoushttp://www.blogger.com/profile/04168922717655562721noreply@blogger.com5tag:blogger.com,1999:blog-6167053228142922997.post-68625342844733838542014-10-09T16:04:00.000-04:002014-10-09T16:04:31.627-04:00Next-Gen vs. Traditional VAs<span style="font-size: small;"><span style="font-family: Verdana,sans-serif;">Over the past several years, I've published a few articles questioning the value of deferred variable annuities with income guarantee riders (VA/GLWBs), including one in the <a href="http://www.iijournals.com/doi/abs/10.3905/jor.2013.1.1.100" target="_blank">Summer 2013 issue of the Journal of Retirement</a>. These VAs with guarantees are marketed as offering upside potential, downside protection, and liquidity all in one convenient package. But my concern is that the impact of compounding fees over time creates an overwhelming cost to the VA/GLWB user, such that one could be better off by just combining stocks and simple income annuities. That was a conclusion in my article about the <a href="http://wpfau.blogspot.com/2012/09/an-efficient-frontier-for-retirement.html" target="_blank">efficient frontier for retirement income</a>. </span></span><br />
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<span style="font-size: small;"><span style="font-family: Verdana,sans-serif;">Along these lines, Jefferson National asked me to write a <a href="https://www.jeffnat.com/knowledge-bank/whitepapers/a-new-approach-to-retirement-income-next-gen-vs-traditional-vas/" target="_blank">sponsored </a><a href="https://www.jeffnat.com/knowledge-bank/whitepapers/a-new-approach-to-retirement-income-next-gen-vs-traditional-vas/" target="_blank">white paper</a> [you are supposed to be a financial advisor to gain access to the paper, and this VA is not otherwise available directly to consumers] about their new Monument Advisor investment-only variable annuity designed to be used by financial advisors. Fees for the Monument Advisor variable annuity add up to $240 per year for an account of any size, and the reason to consider this VA is because the advisor and client have already determined that there is value to the financial plan by seeking the tax deferral offered by variable annuities. Besides these tax deferral aspects, the VA otherwise basically behaves like a traditional investment account, at least after age 59.5.</span></span><br />
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<span style="font-size: small;"><span style="font-family: Verdana,sans-serif;">So the question becomes: should someone seeking tax deferral through a variable annuity use the low-cost Monument Advisor investment only approach, or should they go ahead and proceed with traditional VA with guarantee riders, which may also include commissions, insurance, and guarantee fees?</span></span><br />
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<span style="font-size: small;"><span style="font-family: Verdana,sans-serif;">In the article I reinterpret this question in terms of: what will be the difference in outcomes for someone using a lower-cost investment-only VA vs. someone using a higher cost VA with guarantees, in terms of the retirement income that can be supported.</span></span><br />
<span style="font-size: small;"><span style="font-family: Verdana,sans-serif;"><br /></span></span>
<span style="font-size: small;"><span style="font-family: Verdana,sans-serif;">Obviously, if the investment portfolio is depleted, someone will be happy to still have guaranteed income. But the value of that guaranteed income can be oversold. Fees in the VA/GLWB will have eaten away the account value more quickly, so that there will be no growth in benefits to keep pace with inflation, and there will be no liquidity either. As inflation erodes the value of the VA/GLWB's guaranteed income, the real value of this guaranteed income could become much less than the user realizes. When markets are down, a VA/GLWB ends up behaving like a SPIA, but with a lower payout rate. And the question is: what has the VA/GLWB user given up in the process of seeking the somewhat illusionary upside potential and liquidity for their assets? Again, the illusionary nature of these is that compounding fees eat away at the potential for either upside or liquidity when it may be most needed later in retirement. </span></span><br />
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<span style="font-size: small;"><span style="font-family: Verdana,sans-serif;">In the white paper, I first review the points made in favor of using VA/GLWBs, including tax deferral, the ability to lock in growth for a hypothetical benefit base during accumulation, the ability to guarantee income for life, and liquidity.</span></span><br />
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<span style="font-size: small;"><span style="font-family: Verdana,sans-serif;">Then I construct a composite hypothetical VA/GLWB, based on the characteristics of those offered by 5 major companies. I look at maximum allowed equity allocations of both 60% and 100%, a guaranteed roll-up rate in the deferral period of 5.3% compounded, a 1.29% mortality and expense fee on the account value, a 1.35% rider fee on the benefit base (which can end up being a much higher percent of the remaining assets when the account value is less), a 4.8% guaranteed income withdrawal rate for a 65 year old, and annual fees of $39.</span></span><br />
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<span style="font-size: small;"><span style="font-family: Verdana,sans-serif;">This compares to the investment-only VA with annual fees of $240 and a 1% annual advisory and investment fee applied to the account value. </span></span><br />
<span style="font-size: small;"><span style="font-family: Verdana,sans-serif;"><br /></span></span>
<span style="font-size: small;"><span style="font-family: Verdana,sans-serif;">With Monte Carlo simulations, I then investigate the amount of lifetime guaranteed income supported by the VA/GLWB, and then try to replicate the same withdrawals from the investment-only VA. </span></span><br />
<span style="font-size: small;"><span style="font-family: Verdana,sans-serif;"><br /></span></span>
<span style="font-size: small;"><span style="font-family: Verdana,sans-serif;">Let me provide one example based from the article. Consider a 10 year accumulation period followed by a 30 year distribution period. There is a 58% chance that the VA/GLWB contract value will have hit zero (though the guaranteed income would still be provided). There is a 12.1% chance that the investment-only VA would be depleted while replicating the same payments. In the median outcome, the VA/GLWB would be depleted. In the median for the investment-only VA, the VA would have supported all of the income provided by the VA/GLWB and still have a real value of $159,709, relative to $100,000 at the start. Real wealth actually grew by 60%.</span></span><br />
<span style="font-size: small;"><span style="font-family: Verdana,sans-serif;"><br /></span></span>
<span style="font-size: small;"><span style="font-family: Verdana,sans-serif;">Ultimately there is no single answer about what is right, as it depends on a person's preferences, but this analysis helps to make clear about the tradeoffs involved. With the VA/GLWB, some guaranteed income will always be provided, though in real terms it may end up being quite low. The effect of the compounding fees is dramatic. It is much less likely that there will be any liquidity, because fees eat away at the contract value. In this example, there was a 12.1% chance of running out of assets with the investment-only approach. But in the median outcome, the investment-only approach could have matched income from the VA/GLWB and still experience real asset growth of almost 60%. That's the true cost of the guarantee. And making these costs more clear is the point of the white paper. </span></span><br />
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<br />Anonymoushttp://www.blogger.com/profile/04168922717655562721noreply@blogger.com8tag:blogger.com,1999:blog-6167053228142922997.post-18843918518528326902014-10-09T09:28:00.000-04:002014-10-09T16:33:24.340-04:00Retirement Income Research in the new issue of the Journal of Personal Finance<span style="font-family: Verdana, sans-serif;">The Fall 2014 issue of the Journal of Personal Finance is available. It's the first issue in which Joseph Tomlinson and I have served as co-editors. A more complete announcement about the journal and its articles is included below, but first I'd like to highlight the two articles in the issue that are of more direct relevance to retirement income research. </span><br />
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<b><span style="font-family: Verdana, sans-serif;">Portfolio Size Matters</span></b><br />
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<span style="font-family: Verdana, sans-serif;">First, the lead article by <a href="http://r20.rs6.net/tn.jsp?f=001-I-1GdZt-ImQpmF6KCLm3p6iGCRH6GpL0tci0DPuqqvp2m-F69m_sqDBTO7YxC554asmuRhvrNC_DWOqW-qZBG6-MDSfYrgvhW4r_VmVeOpnGarP02em0zS2dM4EBdzaNoqsnFVlNdMkxf5MNWtT6wbHhYNKTvY1AgqER-XFzsrel7EnFHYpx6tCT2vLQTN4ky9UZP5Nl2XaxVJgPWMNHRosmb_pJO99c_dFwDVy5Tb_ODkonvg-DwPfYPQzSv9-imgxHKdtclY=&c=iu8jqV21N4TUiKR9ickx5HO-d-L401XhMI1GhfywDGG3yv59YZ9F-Q==&ch=o4AYn-Fnz5WEPK_anCWOIPu60_yeg001TeQoi7joGnDXM86L-Ez_Hw==" shape="rect" style="color: #007da1;" target="_blank">Gordon Irlam</a> is about dynamic asset allocation over the lifecycle. I think this is a fascinating article and is well worth reading. In a <a href="http://wpfau.blogspot.com/2014/09/retirement-risk-rising-equity.html" target="_blank">recent post</a>, I mentioned that there are three general ways to approach dynamic asset allocation: mechanical glidepaths based on age, valuation-based allocation, or the funded ratio. Gordon's research works at the intersection of mechanical glidepaths and the funded ratio, as he finds that the optimal asset allocation does depend not only on age, but it also very much depends on the ratio of one's portfolio wealth to their desired spending amount in retirement (the Relative Portfolio Size [RPS] which is 1 / withdrawal rate). </span><br />
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<span style="font-family: Verdana, sans-serif;">In other words, target date funds are inadequate because they base asset allocation only on age, when the funded status of the individual (the RPS) is just as important to determining optimal asset allocation. Of course, the point of target date funds is to move people in the right direction when they don't care about investing and have no idea what their RPS is, but more sophisticated investors should be able to do better than just using a mechanical glidepath.</span><br />
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<span style="font-family: Verdana, sans-serif;">Calculations are made using dynamic programming, which works backward to determine the optimal asset allocation at a particular age after accounting for what will be optimal at subsequent ages. He analyzes cases with a fixed life expectancies and variable life expectancies, and also for cases with and without a motive to leave a bequest. A summary of what his figures show is:</span><br />
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<span style="font-family: Verdana, sans-serif;">Figure 1: Success rates are naturally higher when the RPS is higher (implying the ability to use a lower withdrawal rate to meet one's goal). The highest RPS is needed in the years around the retirement date and after. After withdrawals begin, there is less opportunity for the portfolio to grow.</span><br />
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<span style="font-family: Verdana, sans-serif;">Figure 2: Optimal stock allocations decrease as the RPS gets larger at any particular age. Those able to use quite low withdrawal rates to meet their goals and who have no bequest motive have already won the game (in the language of William Bernstein), and so they can make due with a low stock allocation. Conversely, those with a low RPS will maximize the chances to meet their spending goals with a more aggressive stock allocation. Taking more risk is the Hail Mary pass to try and make the plan work. </span><br />
<span style="font-family: Verdana, sans-serif;"><br /></span>
<span style="font-family: Verdana, sans-serif;">Figure 3: This figure moves away from a fixed age of death to a variable age of death. It increases the role for balanced portfolios later in life, since uncertainty remains for how long one can be expected to remain alive.</span><br />
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<span style="font-family: Verdana, sans-serif;">Figure 4: This figure is really interesting, because it shows the optimal lifetime asset allocations for various individual Monte Carlo simulations. Note that there is a general tendency for a U-shaped lifetime asset allocation path. Stocks allocations are highest when young, lowest near the retirement date, and then increase again at higher ages. This is where my research with Michael Kitces about the rising equity glidepaths fits in. It's not that the rising glidepath is always optimal, but we think it is the best approximation that can be made for someone if we are not otherwise able to incorporate information about their funded status or RPS. The figure shows that in some simulations, the stock allocation does continue to decrease at higher and higher ages. Those would be simulations where things went quite well and the RPS continues to grow throughout retirement, so it is not necessary to have any stocks. Remember, at this stage in the research we are just looking at the optimal asset allocations to meet a fixed spending goal. There is no need for further upside potential because spending will not increase and we don't care about leaving a bequest. </span><br />
<span style="font-family: Verdana, sans-serif;"><br /></span>
<span style="font-family: Verdana, sans-serif;">Figure 5: Now he adds a bequest motive. The retiree also cares about leaving a bequest. This is a very interesting figure because it introduces higher stock allocations at low and high ages for people with very high RPS levels. As such, if Figure 4 was re-done with the bequest motive, I'm pretty sure that Figure 5 implies that a U-shaped lifetime asset allocation will apply to even more simulations (i.e. have the lowest stock allocation at retirement, and have higher stock allocations when young or old). </span><br />
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<span style="font-family: Verdana, sans-serif;">He finishes the article with some sensitivity analysis about how changing assumptions would change the optimal asset allocations, and he also shows how a more optimal asset allocation strategy that includes the RPS will reduce the amount of wealth needed at retirement relative to various rules of thumb or target date fund glidepaths.</span><br />
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<span style="font-family: Verdana, sans-serif;">Gordon is doing great work, and he has developed <a href="http://www.aacalc.com/">www.aacalc.com</a> to allow users the opportunity to test their approach for different circumstances. </span><br />
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<b><span style="font-family: Verdana, sans-serif;">The Actuarial Approach</span></b><br />
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<span style="font-family: Verdana, sans-serif;">In the next article, <a href="http://r20.rs6.net/tn.jsp?f=001-I-1GdZt-ImQpmF6KCLm3p6iGCRH6GpL0tci0DPuqqvp2m-F69m_sqDBTO7YxC55sJdy_9hj96b8fhCyXH_uCk6QSKhGx0OIO4U76VGYPNIshysgbXPU2PxMjsTJoaWXZAOkXwjUQY3YFCTeKqjoEzhKpAQYugOv0czlfhi58iRK237hqDSeT8nQY6keDSXxKE4TTtS7vFlpUkBwJP8PEZ_21bh7onVk3jabnkU3S5KJyBSxYuzJNPTdnCjVeIRwrrz5IULHVXY=&c=iu8jqV21N4TUiKR9ickx5HO-d-L401XhMI1GhfywDGG3yv59YZ9F-Q==&ch=o4AYn-Fnz5WEPK_anCWOIPu60_yeg001TeQoi7joGnDXM86L-Ez_Hw==" shape="rect" style="color: #007da1;" target="_blank">Ken Steiner</a> proposes an actuarial approach to planning for taking withdrawals from savings to support retirement. Ken is a retired fellow at the Society of Actuaries, and he hosts the blog, <a href="http://howmuchcaniaffordtospendinretirement.blogspot.com/" target="_blank">How Much Can I Afford to Spend in Retirement?</a> The five step actuarial process he outlines includes:</span><br />
<span style="font-family: Verdana, sans-serif;"><br /></span>
<span style="font-family: Verdana, sans-serif;">1. Gather data</span><br />
<span style="font-family: Verdana, sans-serif;"><br /></span>
<span style="font-family: Verdana, sans-serif;">2. Make relevant assumptions about future market returns, future inflation, and remaining time horizon</span><br />
<span style="font-family: Verdana, sans-serif;"><br /></span>
<span style="font-family: Verdana, sans-serif;">3. Calculate the preliminary spendable amount, which is a mathematical calculation of the sustainable spending amount that would lead precisely to portfolio depletion (or the desired bequest amount) and the end of the planning horizon</span><br />
<span style="font-family: Verdana, sans-serif;"><br /></span>
<span style="font-family: Verdana, sans-serif;">4. Apply a smoothing technique for spending so that annual spending doesn't fluctuate too much based on what is calculated in step 3. </span><br />
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<span style="font-family: Verdana, sans-serif;">5. Store the results for next year's analysis.</span><br />
<span style="font-family: Verdana, sans-serif;"><br /></span>
<span style="font-family: Verdana, sans-serif;">He finishes the article with a comparison for how his approach performs against an RMD strategy, the 4% rule, and a strategy of withdrawing 4% of the remaining blaance each year. </span><br />
<span style="font-family: Verdana, sans-serif;"><br /></span>
<span style="font-family: Verdana, sans-serif;">This article is highly worthwhile as well.</span><br />
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<span style="font-family: Verdana, sans-serif;">And now for the journal announcement:</span><br />
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Journal of Personal Finance<br />
Vol 13 Issue 2</div>
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The<b><i> <a href="http://r20.rs6.net/tn.jsp?f=001-I-1GdZt-ImQpmF6KCLm3p6iGCRH6GpL0tci0DPuqqvp2m-F69m_spiYVyT-qnG0v_CyJUaxZ0n6vRgv6qXWm8SuCmIGFl8YDfsKvj12DrYNtxobgs94wAIjgrNHC1Z_d3sQ76CRTA_hfohiqD1qf6ctWIiPqFkSDDhMRNdqFslPozAcUQrVLhi9dAgS8IDZ8MOo5sU-vnVeQUD9nV1yLTPaODlpgRCS&c=iu8jqV21N4TUiKR9ickx5HO-d-L401XhMI1GhfywDGG3yv59YZ9F-Q==&ch=o4AYn-Fnz5WEPK_anCWOIPu60_yeg001TeQoi7joGnDXM86L-Ez_Hw==" shape="rect" style="color: #007da1; text-decoration: underline;" target="_blank">Journal of Personal Finance</a></i></b> with co-editors <a href="http://r20.rs6.net/tn.jsp?f=001-I-1GdZt-ImQpmF6KCLm3p6iGCRH6GpL0tci0DPuqqvp2m-F69m_spiYVyT-qnG0XTEJ5L5fnw4fFOJTZ8oJFC0RIA2ZndHvo0C9_d6nGUF8X15jCnXLZMvz60U7QHWhzThNZbX98jmqGIDmGGgTRs7worE0Miy3zb230yikGu3IqlzzBl2l69-hgDyi6NOrQL6_erohq9TA08KDVr9mTAwcwxJ83UgF&c=iu8jqV21N4TUiKR9ickx5HO-d-L401XhMI1GhfywDGG3yv59YZ9F-Q==&ch=o4AYn-Fnz5WEPK_anCWOIPu60_yeg001TeQoi7joGnDXM86L-Ez_Hw==" shape="rect" style="color: #008887; text-decoration: underline;" target="_blank">Wade D. Pfau and Joe Tomlinson</a> is available to you. The <i>Journal</i>
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<i>Journal of Personal Finance</i><br />
editors' notes</div>
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<div style="margin-bottom: 0px; margin-top: 0px;">
This issue begins with a paper by <a href="http://r20.rs6.net/tn.jsp?f=001-I-1GdZt-ImQpmF6KCLm3p6iGCRH6GpL0tci0DPuqqvp2m-F69m_sqDBTO7YxC554asmuRhvrNC_DWOqW-qZBG6-MDSfYrgvhW4r_VmVeOpnGarP02em0zS2dM4EBdzaNoqsnFVlNdMkxf5MNWtT6wbHhYNKTvY1AgqER-XFzsrel7EnFHYpx6tCT2vLQTN4ky9UZP5Nl2XaxVJgPWMNHRosmb_pJO99c_dFwDVy5Tb_ODkonvg-DwPfYPQzSv9-imgxHKdtclY=&c=iu8jqV21N4TUiKR9ickx5HO-d-L401XhMI1GhfywDGG3yv59YZ9F-Q==&ch=o4AYn-Fnz5WEPK_anCWOIPu60_yeg001TeQoi7joGnDXM86L-Ez_Hw==" shape="rect" style="color: #007da1; text-decoration: underline;" target="_blank">Gordon Irlam</a>
that applies the economists' life-cycle finance approach to determining
optimal asset allocations for retirement. The author demonstrates the
inappropriateness of the common rule of thumb that stock allocations
should be determined by age.</div>
<div style="margin-bottom: 0px; margin-top: 0px;">
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<div style="margin-bottom: 0px; margin-top: 0px;">
He demonstrates that
portfolio size also needs to be considered. Applying the life-cycle
finance approach and the use of accompanying tools such as stochastic
dynamic programming is gaining more attention as a research area, and it
shows promise for developing practical applications.</div>
<div style="margin-bottom: 0px; margin-top: 0px;">
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<div style="margin-bottom: 0px; margin-top: 0px;">
The second paper by <a href="http://r20.rs6.net/tn.jsp?f=001-I-1GdZt-ImQpmF6KCLm3p6iGCRH6GpL0tci0DPuqqvp2m-F69m_sqDBTO7YxC55cVQOSahQvLIud8KX8A0TcXUv2yASlsRe4d1OFCTd3NuLlbe4gTB2gr4DpNoi1UXDJI4hVI9IQHXgbIvWO-2zlY_Vg4ldRNAL01WFC53AbN8DY72oycMLPfc1pMNETVxN7LoPq_sX9rt5VEj7z6rCx7-HrL3cRgQE2dlzNXVwDDqwHFhG-29uWlyVhr9PynNjmgUuLZghHwk=&c=iu8jqV21N4TUiKR9ickx5HO-d-L401XhMI1GhfywDGG3yv59YZ9F-Q==&ch=o4AYn-Fnz5WEPK_anCWOIPu60_yeg001TeQoi7joGnDXM86L-Ez_Hw==" shape="rect" style="color: #007da1; text-decoration: underline;" target="_blank">Janet Koposko and Douglas Hershey</a>
deals with the impact of early life influences on planning for
retirement many years later. The authors conduct a survey of college
students who report the extent of childhood personal finance lessons
learned, and the study relates this early experience to expectations of
future planning and anticipated satisfaction with retirement. They find
that early experiences are likely to carry even much later in life.</div>
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<div style="margin-bottom: 0px; margin-top: 0px;">
The next paper by <a href="http://r20.rs6.net/tn.jsp?f=001-I-1GdZt-ImQpmF6KCLm3p6iGCRH6GpL0tci0DPuqqvp2m-F69m_sqDBTO7YxC55j9DY3ZCg8drR9zsPNgig3mF66G0AjOmiIz-7EEA2ou5kTIQkS9_F7F8vCniZf_y7P-FnHWeSyBe2AiTLVH5O5y74DyApX6mq4XNUgw8e4_Aq9fycFaubBcV1OlnhIqQ8SClFD1GC6KhQqT5QQ9ljZzScZfp_EQ3gNvcHfB74JgyGhqryk3mR6VdpoL2jts3OrnJd4Ed_6Pc=&c=iu8jqV21N4TUiKR9ickx5HO-d-L401XhMI1GhfywDGG3yv59YZ9F-Q==&ch=o4AYn-Fnz5WEPK_anCWOIPu60_yeg001TeQoi7joGnDXM86L-Ez_Hw==" shape="rect" style="color: #007da1; text-decoration: underline;" target="_blank">Chad Smith and Gustavo Barboza</a>
bears some similarity to the Koposko/Hershey paper, but focuses on the
impact of early influences on how college students deal with current
financial issues. They find that financial lessons imparted from parents
to students can play a strong role in reducing the financial burdens
students assume. They also find that overconfidence can play a role in
leading students to take on too much debt.</div>
<div style="margin-bottom: 0px; margin-top: 0px;">
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<div style="margin-bottom: 0px; margin-top: 0px;">
In the next paper, <a href="http://r20.rs6.net/tn.jsp?f=001-I-1GdZt-ImQpmF6KCLm3p6iGCRH6GpL0tci0DPuqqvp2m-F69m_sqDBTO7YxC55sJdy_9hj96b8fhCyXH_uCk6QSKhGx0OIO4U76VGYPNIshysgbXPU2PxMjsTJoaWXZAOkXwjUQY3YFCTeKqjoEzhKpAQYugOv0czlfhi58iRK237hqDSeT8nQY6keDSXxKE4TTtS7vFlpUkBwJP8PEZ_21bh7onVk3jabnkU3S5KJyBSxYuzJNPTdnCjVeIRwrrz5IULHVXY=&c=iu8jqV21N4TUiKR9ickx5HO-d-L401XhMI1GhfywDGG3yv59YZ9F-Q==&ch=o4AYn-Fnz5WEPK_anCWOIPu60_yeg001TeQoi7joGnDXM86L-Ez_Hw==" shape="rect" style="color: #007da1; text-decoration: underline;" target="_blank">Ken Steiner</a>
proposes an actuarial approach to planning for taking withdrawals from
savings to support retirement. His particular method bears similarities
to the approach actuaries take in dealing with pension plans, and
involves taking a fresh look at assets and liabilities each year, and
making changes to the spending plan as appropriate.</div>
<div style="margin-bottom: 0px; margin-top: 0px;">
<br /></div>
<div style="margin-bottom: 0px; margin-top: 0px;">
He also suggests a smoothing technique to avoid too much disruption to spending plans. Next, we present a short paper by <a href="http://r20.rs6.net/tn.jsp?f=001-I-1GdZt-ImQpmF6KCLm3p6iGCRH6GpL0tci0DPuqqvp2m-F69m_sqDBTO7YxC55R7t_GCKDgCHt2jCTqSMRf5yGr5_3_h3h09j3Qo1LIuCmujCbf68hNM95ypk-AbVMMMTNjZhYCehobQnY0frr7qTxKvyaX_mucWSZ-EQnzj4CMEcULOkTUEIbPQB6qMM1_MIGLZA7SE7Jjgu5k2SDvEyX0AchE9Ca_x0-GK4W5hPoDPiikcF1V2QgSHy8SlU3dEwkwRZt31Q=&c=iu8jqV21N4TUiKR9ickx5HO-d-L401XhMI1GhfywDGG3yv59YZ9F-Q==&ch=o4AYn-Fnz5WEPK_anCWOIPu60_yeg001TeQoi7joGnDXM86L-Ez_Hw==" shape="rect" style="color: #007da1; text-decoration: underline;" target="_blank">David Swingler</a>
that may appeal to those interested in financial math. He is an
engineering professor, and he demonstrates the process he has gone
through to develop a rule-of-thumb to apply to a common problem in
finance math regarding the present value of a series of future payments.</div>
<div style="margin-bottom: 0px; margin-top: 0px;">
<br /></div>
<div style="margin-bottom: 0px; margin-top: 0px;">
The paper by <a href="http://r20.rs6.net/tn.jsp?f=001-I-1GdZt-ImQpmF6KCLm3p6iGCRH6GpL0tci0DPuqqvp2m-F69m_sqDBTO7YxC559eYHPtB70pt5Iv94c0bQE4sItHUGNhM5l1rLJF0OsmoDcGwqoeVvQ2SndxPYZcH3cOXpXQCmyz_QlZTeJYUvPVSorkcosvBNne-fP-fWEz2slEbmuN6yAn4h4GGgr1Orlo55xkQw55c83x_E4aro3V3tJ5_TgK3I0vLqWiL9YMTPR52WlBQ0RIuGzUmQL3sAvOyOBnKqvoM=&c=iu8jqV21N4TUiKR9ickx5HO-d-L401XhMI1GhfywDGG3yv59YZ9F-Q==&ch=o4AYn-Fnz5WEPK_anCWOIPu60_yeg001TeQoi7joGnDXM86L-Ez_Hw==" shape="rect" style="color: #007da1; text-decoration: underline;" target="_blank">Terrance Martin, Michael Finke, and Philip Gibson</a>
deals with the important issue of how race and trust affect the
decision to seek financial planning services and the accumulation of
retirement wealth. The study reports differences between black and
Hispanic households in terms of the impact of low trust on financial
planning decisions.</div>
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<div style="margin-bottom: 0px; margin-top: 0px;">
Finally,<a href="http://r20.rs6.net/tn.jsp?f=001-I-1GdZt-ImQpmF6KCLm3p6iGCRH6GpL0tci0DPuqqvp2m-F69m_sqDBTO7YxC55SawE-Cf_BF_na-DtUdK-BA2-OCECl2MggIEkUjzvVElHOJ-J_Ze-mBoYOZPxSkrEP5htwzk24CtHCgtiBHrUW1L89_D1NQC7ngVb8Eses56QHUwXsGIkGbTd_qaYAhpg2fYhn3QQhoz-GRrpbBMWTNTQwwBU4ojcTCxUDtMgKSL_hUnwb1ujdkHTU3Bq-wf6i1nXzsO9sMQ=&c=iu8jqV21N4TUiKR9ickx5HO-d-L401XhMI1GhfywDGG3yv59YZ9F-Q==&ch=o4AYn-Fnz5WEPK_anCWOIPu60_yeg001TeQoi7joGnDXM86L-Ez_Hw==" shape="rect" style="color: #007da1; text-decoration: underline;" target="_blank"> Michael Guillemette, Russell James, and Jeff Larsen</a>
provide us with a paper in the relatively new subject area of applying
neuroscience to financial planning research. They report on experiments
to test whether loss aversion is altered when subjects are placed under
higher cognitive load, with more demands placed on mental processing. We
will likely be seeing more neuroscience research in areas such as risk
tolerance assessment.</div>
<div style="margin-bottom: 0px; margin-top: 0px;">
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<div style="margin-bottom: 0px; margin-top: 0px;">
As new co-editors, we
welcome the submission of research papers that uncover new insights in
personal finance and show the potential to have an impact on the
financial advice provided to individuals.</div>
<div style="margin-bottom: 0px; margin-top: 0px;">
<br /></div>
- <a href="http://r20.rs6.net/tn.jsp?f=001-I-1GdZt-ImQpmF6KCLm3p6iGCRH6GpL0tci0DPuqqvp2m-F69m_spiYVyT-qnG0XTEJ5L5fnw4fFOJTZ8oJFC0RIA2ZndHvo0C9_d6nGUF8X15jCnXLZMvz60U7QHWhzThNZbX98jmqGIDmGGgTRs7worE0Miy3zb230yikGu3IqlzzBl2l69-hgDyi6NOrQL6_erohq9TA08KDVr9mTAwcwxJ83UgF&c=iu8jqV21N4TUiKR9ickx5HO-d-L401XhMI1GhfywDGG3yv59YZ9F-Q==&ch=o4AYn-Fnz5WEPK_anCWOIPu60_yeg001TeQoi7joGnDXM86L-Ez_Hw==" shape="rect" style="color: #007da1; text-decoration: underline;" target="_blank">Joseph A. Tomlinson</a>, FSA, CFP™<br />
- <a href="http://r20.rs6.net/tn.jsp?f=001-I-1GdZt-ImQpmF6KCLm3p6iGCRH6GpL0tci0DPuqqvp2m-F69m_spiYVyT-qnG0XTEJ5L5fnw4fFOJTZ8oJFC0RIA2ZndHvo0C9_d6nGUF8X15jCnXLZMvz60U7QHWhzThNZbX98jmqGIDmGGgTRs7worE0Miy3zb230yikGu3IqlzzBl2l69-hgDyi6NOrQL6_erohq9TA08KDVr9mTAwcwxJ83UgF&c=iu8jqV21N4TUiKR9ickx5HO-d-L401XhMI1GhfywDGG3yv59YZ9F-Q==&ch=o4AYn-Fnz5WEPK_anCWOIPu60_yeg001TeQoi7joGnDXM86L-Ez_Hw==" shape="rect" style="color: #007da1; text-decoration: underline;" target="_blank">Wade D. Pfau</a>, Ph.D., CFA<br />
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The <i>Journal </i>encourages <a href="http://r20.rs6.net/tn.jsp?f=001-I-1GdZt-ImQpmF6KCLm3p6iGCRH6GpL0tci0DPuqqvp2m-F69m_srp3ot5k_LnepK82Ehon6d_ilOrIqpw0xDIKZg6V7TX9Ybng9lTF_DoQ0b0_EEzzeE0Fh21tHNnKZcnIKUadE5gt0YuQDgBG_ZlZxYRA-rpEXVn7V6tlTaiWXHBnej--FbG2wrQXkutqyVyxTGbWn4FvIcGZEhFlQ-2yLIlbQb_g&c=iu8jqV21N4TUiKR9ickx5HO-d-L401XhMI1GhfywDGG3yv59YZ9F-Q==&ch=o4AYn-Fnz5WEPK_anCWOIPu60_yeg001TeQoi7joGnDXM86L-Ez_Hw==" shape="rect" style="color: #007da1; text-decoration: underline;" target="_blank">submission of manuscripts</a> in topics related to household financial decision making. More information regarding the <i>Journal of Personal Finance</i><br />
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can be found by visiting the website <span style="color: #001a81;"><a href="http://r20.rs6.net/tn.jsp?f=001-I-1GdZt-ImQpmF6KCLm3p6iGCRH6GpL0tci0DPuqqvp2m-F69m_su1ppFqK1he_1XPkaUqshwKlZ-mGF-w5M0R6Z97vQUizTCcYu_e8Xt5_1Ed5hKzuj5R-8wfchF2dlmHu5gevIjQp_HXf4m_e7vxSPI57desElqtquWe_1VUuMIfVx149iyVM-D0qTZ3a&c=iu8jqV21N4TUiKR9ickx5HO-d-L401XhMI1GhfywDGG3yv59YZ9F-Q==&ch=o4AYn-Fnz5WEPK_anCWOIPu60_yeg001TeQoi7joGnDXM86L-Ez_Hw==" shape="rect" style="color: #007da1; text-decoration: underline;" target="_blank">www.journalofpersonalfinance.<wbr></wbr>com</a></span></div>
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Anonymoushttp://www.blogger.com/profile/04168922717655562721noreply@blogger.com0tag:blogger.com,1999:blog-6167053228142922997.post-64716688042919705962014-10-06T21:09:00.000-04:002014-10-06T21:09:27.523-04:00Celebrating 20 Years of the 4% Rule<span style="font-family: Verdana, sans-serif;">In was 20 years ago today...</span><br />
<span style="font-family: Verdana, sans-serif;"><br /></span>
<span style="font-family: Verdana, sans-serif;">The October 1994 issue of the <i>Journal of Financial Planning</i> contained William Bengen's article, "Determining Withdrawal Rates Using Historical Data." This article has had a truly profound effect on retirement income planning. In fact, one might argue that the article gave birth to retirement income planning. With this article, it becomes clear that post-retirement and pre-retirement investing are different beasts, as sequence of returns risk plays a bigger role when distributions are taken from the portfolio. In celebration of this 20-year anniversary, the <i>Journal of Financial Planning</i> currently has <a href="http://www.onefpa.org/journal/Documents/Bengen%20Oct%201994.pdf" target="_blank">Bengen's original article</a> on its main webpage. As well, Jonathan Guyton has written a wonderful <a href="http://www.onefpa.org/journal/Documents/Oct2014_CoverStory.pdf" target="_blank">cover story</a> about Bengen's work, placing it in the historical context of where financial planning was in the 1990s, and how much things have changed in the past 20 years. </span><br />
<span style="font-family: Verdana, sans-serif;"><br /></span>
<span style="font-family: Verdana, sans-serif;">That history lesson is especially valuable for me. In the article you will see excerpts from a short interview I had with the journal. One of the questions which was cut was: where was I 20 years ago? Well, I was just getting underway with my senior year of high school. It would still be a long time before I heard about the article. </span><br />
<span style="font-family: Verdana, sans-serif;"><br /></span>
<span style="font-family: Verdana, sans-serif;">It's also worth noting that precisely 10 years ago in October 2004, Jonathan Guyton's first groundbreaking article on decision rules to guide retirement spending in response to portfolio performance was published.</span><br />
<span style="font-family: Verdana, sans-serif;"><br /></span>
<span style="font-family: Verdana, sans-serif;">In recognition of this anniversary, last week I spoke with financial planner Joshua Sheets on his Radical Personal Finance podcast about the history of the 4% rule. You can hear the <a href="http://radicalpersonalfinance.com/73/" target="_blank">podcast here</a>.</span>Anonymoushttp://www.blogger.com/profile/04168922717655562721noreply@blogger.com0tag:blogger.com,1999:blog-6167053228142922997.post-91436963444702206332014-10-02T23:31:00.000-04:002014-10-03T15:55:50.232-04:00Meet Dirk Cotton, Joseph Tomlinson, Robert Powell and me in Manhattan on October 15<span style="font-family: Verdana, sans-serif;">Details are below for this free event sponsored by MarketWatch:</span><br />
<span style="font-family: Verdana, sans-serif;"><br /></span>
<br />
<h6 style="background: 0px 0px rgb(255, 255, 255); border: 0px; box-sizing: border-box; color: #333333; line-height: 1.4; margin: 0px 0px 2px; outline: 0px; padding: 0px; vertical-align: baseline;">
<span style="font-family: Verdana, sans-serif; font-size: small;">MarketWatch Retirement Adviser: From Savings to Income</span></h6>
<div style="background: 0px 0px rgb(255, 255, 255); border: 0px; box-sizing: border-box; color: #333333; line-height: 24px; margin-bottom: 15px; outline: 0px; padding: 0px; vertical-align: baseline;">
<span style="font-family: Verdana, sans-serif;">You’re invited: If you are planning to be in New York Oct. 15, we’d like to invite you to a free breakfast and panel discussion on how to convert retirement savings into retirement income. This Retirement Adviser event will be moderated by MarketWatch Senior Columnist and Retirement Weekly Editor Robert Powell. His guest panelists will be Wade D. Pfau, Professor of Retirement Income at The American College; Joseph A. Tomlinson, an actuary and financial planner based in Greenville, Maine; and Dirk Cotton, a financial planner in Chapel Hill, N.C. and former Fortune 500 executive. The panel will discuss withdrawal and income planning strategies, annuities, tax planning and more, and answer your questions. The event is free and begins with breakfast at 8:30 a.m. Seating is limited. For more information or to RSVP, please email <a class="icon " href="mailto:marketwatchevent@wsj.com" style="background-attachment: initial; background-clip: initial; background-color: initial; background-image: initial; background-origin: initial; background-position: 0px 0px; background-repeat: initial; background-size: initial; box-sizing: border-box; color: #648c94; margin: 0px; outline: 0px; padding: 0px; vertical-align: baseline;" target="_new">MarketWatchevent@wsj.com</a> by Monday, Oct. 13.</span></div>
Anonymoushttp://www.blogger.com/profile/04168922717655562721noreply@blogger.com2tag:blogger.com,1999:blog-6167053228142922997.post-8914110560692465162014-09-26T16:44:00.000-04:002014-09-26T16:44:26.448-04:00Webinar on September 30: Reasonable Portfolio Return Assumptions In Today’s Market<span style="font-size: small;"><span style="font-family: Verdana,sans-serif;"><span>On Tuesday, September 30, from 1pm to 2:30 Eastern time, I will be presenting a webinar with Watermark Adviser Solutions. Anyone is welcome to attend, but
please understand that the presentation is technically meant for
financial advisers.</span></span></span>
<span style="font-size: small;"><span style="font-family: Verdana,sans-serif;"><br /></span></span>
<span style="font-size: small;"><span style="font-family: Verdana,sans-serif;"><span>The
webinars have limited capacity, and previous webinars did fill up
quickly. If you sign up but then determine that you cannot attend, could
you please consider cancelling your registration to make room for
someone else? Thanks.</span></span></span><br />
<br />
<span style="font-size: small;"><span style="font-family: Verdana,sans-serif;"><span>This webinar is about estimating portfolio return assumptions, and there will be lots of new material included. </span></span></span><br />
<br />
<span style="font-size: small;"><span style="font-family: Verdana,sans-serif;"></span></span><span style="font-size: small;"><span style="font-family: Verdana,sans-serif;">To register for this event, please follow this link:</span></span><br />
<br />
<span style="font-size: small;"><span style="font-family: Verdana,sans-serif;">
</span></span><span style="font-size: small;"><span style="font-family: Verdana,sans-serif;"><a href="https://attendee.gotowebinar.com/register/1647173233202712321" target="_blank">Reasonable Portfolio Return Assumptions In Today’s Market</a></span></span><br />
<span style="font-size: small;"><span style="font-family: Verdana,sans-serif;">
</span></span><br />
<span style="font-size: small;"><span style="font-family: Verdana,sans-serif;">We hope you will join us.</span></span><br />
<br />
<span style="font-size: small;"><span style="font-family: Verdana,sans-serif;">Here is a general description:</span></span><br />
<span style="font-size: small;"><span style="font-family: Verdana,sans-serif;">
</span></span><br />
<span style="font-size: small;"><span style="font-family: Verdana,sans-serif;">As many know, there is a significant demand for financial advisers to
evolve from providing only wealth management. We hear and believe that
advisers should also offer retirement income planning as it is
particularly relevant given the needs of today’s investors. The
difference between traditional wealth management and retirement income
planning is that traditional wealth management is only focused on
growing wealth without regard to how the wealth will be used. Retirement
income planning is a more complex planning problem which recognizes the
need to sustain an income stream from the investment portfolio over the
long-term. This is the situation facing thousands of investors today
who are quickly approaching or already in retirement.</span></span><br />
<span style="font-size: small;"><span style="font-family: Verdana,sans-serif;">
</span></span><br />
<span style="font-size: small;"><span style="font-family: Verdana,sans-serif;">In addition, these investors face today’s low interest rate
environment, where investment returns can be expected to be less than
their historical averages. What was a reasonably conservative return
assumption for investors in the early 1980s, since interest rates were
much higher at that time, is likely much too high for a prudently
invested portfolio looking forward from today over the next several
years. There appears to be numerous ways that exist for estimating
future stock returns, and experts disagree about which is the most
appropriate. Some of the methodologies can even become quite technical.</span></span><br />
<span style="font-size: small;"><span style="font-family: Verdana,sans-serif;">
</span></span><br />
<span style="font-size: small;"><span style="font-family: Verdana,sans-serif;">During this webinar, our Director of Retirement Research, Dr. Wade
Pfau, will look to identify a few basic methods which will give a broad
range about future stock and bond returns in order to provide a good
indication about the possibilities for today’s investors. The goal of
our webinar is to help our financial adviser audience not only continue
to understand a framework for retirement income planning, but also
identify more accurate methods to use in the planning process with their
clients.</span></span><br />
<span style="font-size: small;"><span style="font-family: Verdana,sans-serif;"></span></span>Anonymoushttp://www.blogger.com/profile/04168922717655562721noreply@blogger.com0tag:blogger.com,1999:blog-6167053228142922997.post-69536454136353038792014-09-18T14:31:00.000-04:002014-09-18T14:31:39.356-04:00A Challenge and a Response for Rising Equity Glidepaths in Retirement<!--[if gte mso 9]><xml>
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<br />
<div class="MsoNormal">
<span style="font-size: small;"><span style="font-family: Verdana,sans-serif;">Jared Kizer of the BAM ALLIANCE recently wrote an article
called, <a href="http://www.multifactorworld.com/Lists/Posts/Post.aspx?ID=148" target="_blank">“An Analytical Evaluation of Rising Glidepath Claims”</a> which concludes
that there is no value in using a rising equity glidepath during retirement,
contrary to the conclusions that we (</span></span><span style="font-size: small;"><span style="font-family: Verdana,sans-serif;"><span style="font-size: small;"><span style="font-family: Verdana,sans-serif;">Wade Pfau and </span></span>Michael Kitces) reached in research
published in the <a href="http://www.onefpa.org/journal/Pages/Reducing%20Retirement%20Risk%20with%20a%20Rising%20Equity%20Glide%20Path.aspx" target="_blank">January 2014 Journal of Financial Planning</a>. We welcome feedback
and criticism of our research and are willing to make changes
when justified (in fact, <a href="http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2497053">just this
week we released our own follow-up research</a> showing that rising equity
glidepaths are only best in a narrow set of specific circumstances, albeit ones
that are present today). But in this case, while we both have a lot of respect for
the research and books generated by Jared and his colleagues at the BAM
ALLIANCE (such that we took his article quite seriously), we don’t think his
criticisms hold under scrutiny.</span></span></div>
<div class="MsoNormal">
<br /></div>
<span style="font-size: small;"><span style="font-family: Verdana,sans-serif;">
</span></span><div class="MsoNormal">
<span style="font-size: small;"><span style="font-family: Verdana,sans-serif;">As the BAM ALLIANCE P.R. department has shared Jared’s article
with a large number of media outlets, we feel it’s important to explain why we disagree with the conclusions in Jared’s article. The issue,
though, is that we think there are some important problems with Jared’s
statistical methodology, and so the discussion in his article and here will be
hard to follow for readers who haven’t taken or don’t recall much of what they
learned in their statistics or econometrics classes. Nonetheless, after the
national media blast, Michael and I need to get our side of the story out there
as well.</span></span></div>
<div class="MsoNormal">
<br /></div>
<span style="font-size: small;"><span style="font-family: Verdana,sans-serif;">
</span></span><div class="MsoNormal">
<span style="font-size: small;"><span style="font-family: Verdana,sans-serif;"><b>Probability of
Failure</b></span></span></div>
<span style="font-size: small;"><span style="font-family: Verdana,sans-serif;">
</span></span><div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-size: small;"><span style="font-family: Verdana,sans-serif;">The article begins by making a useful point that if one
strategy has a success rate of 80 percent while another is 81 percent, then you
can’t really say with confidence that the second strategy works better. There
will always be a degree of randomness in the results, and even if the
difference in success rates is “statistically significant” in the way that
statisticians like to use the term, there is still not much real world
practical difference between the numbers.</span></span></div>
<span style="font-size: small;"><span style="font-family: Verdana,sans-serif;">
</span></span><div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-size: small;"><span style="font-family: Verdana,sans-serif;">This is why Michael and I generally frame the results as it
being possible with a rising equity glidepath to get just as good of outcome,
or possibly even better, using a lower average equity allocation. For example, starting
retirement at 30% stocks and slowly increasing to 60% stocks can do just as
well, and maybe even better, than just sticking with the 60% stock allocation
over the whole retirement period (presuming the client had the tolerance to own
60% stocks in the first place and would have done so absent further advice). We
did not attempt to test whether this result is “statistically significant” as
an improvement, because the mere fact that a portfolio with significantly less
equities getting the <i>same </i>result is
still meaningful, though we did find indications that there may be some modest
improvement in outcomes as well. In the quote Jared used from our article, we
said that rising glidepaths have “the potential” to improve outcomes. The safe
withdrawal research says that retirees should hold 50-75% stocks over their
whole retirement as a way to minimize the risk of depleting their wealth, and
we are saying that this isn’t necessarily the case. Those not comfortable with
such high stock allocations can have some comfort with our conclusions.</span></span></div>
<span style="font-size: small;"><span style="font-family: Verdana,sans-serif;">
</span></span><div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-size: small;"><span style="font-family: Verdana,sans-serif;">When Jared gets to the first table in his article, he’s
approaching this matter from an entirely different perspective. He’s asking a
different research question than what we considered. Table 1 is showing whether
rising equity glidepaths as a whole (representing the 55 different rising
glidepaths we considered) can support a higher average success rate for the 4%
rule than declining equity glidepaths as a whole (representing 55 more cases).
The answer he finds is that there is not much statistical evidence to suggest
that rising glidepaths are superior as a whole. Also, which has the higher
average success rate depends on the choice of capital market expectations –
which we actually wanted to illustrate, and is why we tested the analysis with
a wide range of capital market assumptions. </span></span></div>
<span style="font-size: small;"><span style="font-family: Verdana,sans-serif;">
</span></span><div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-size: small;"><span style="font-family: Verdana,sans-serif;">Are rising equity glidepaths superior as a whole? Perhaps
not, but that wasn’t what we were saying in the first place. As Michael
explains it by analogy – our study set out to determine if reputable fund
manager DFA funds provides better performance than other mutual fund families
or traditionally-weighted index funds, so we compared the long-term track
record of DFA to the other fund families and index funds, and concluded that
DFA funds do in fact provide a benefit. Jared’s analysis is the equivalent of
then coming back in, and measuring whether the AVERAGE of DFA funds AND ALL
OTHER MUTUAL FUNDS outperform the indexes, with the conclusion that they do not
because all the fund managers in the aggregate are underperforming by the
average of their fees. He then concludes that DFA cannot possibly provide
value, because the average fund manager underperforms the index. Yet the
conclusion is not actually logically coherent; even if the <i>average </i>of all mutual funds underperform an index, it’s not proof
that a <i>particular </i>fund can’t still be
superior. We were looking for whether the <i>best
</i>fund (or in this case, the best glidepath strategy) can be superior, not
whether the <i>average </i>fund (or <i>average </i>glidepath strategy) is superior,
while Jared just measured the average and then used it to make a logically inappropriate
conclusion about a particular fund/glidepath strategy.</span></span></div>
<span style="font-size: small;"><span style="font-family: Verdana,sans-serif;">
</span></span><div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-size: small;"><span style="font-family: Verdana,sans-serif;">Furthermore, by including the average of <i>all </i>the glidepaths we tested, Jared’s
analysis ends up including scenarios that we presented for the sake of
thoroughness, not because we were ever actually advocating them (even after the
study was published). We're more interested in whether rising glidepaths will
work for situations that real retirees might consider, i.e. we don’t care too
much if a 0% to 10% glidepath isn’t as good as a 10% to 0% glidepath, since
neither should be very realistic choices in the first place. </span></span></div>
<div class="MsoNormal">
<br /></div>
<span style="font-size: small;"><span style="font-family: Verdana,sans-serif;">
</span></span><div class="MsoNormal">
<span style="font-size: small;"><span style="font-family: Verdana,sans-serif;">In addition, there is an important problem with what Jared
does here, though he doesn’t start to discuss the problem until later in the
article. The issue is that our collection of rising equity glidepaths will have
a lower average stock allocation than our collection of declining equity
glidepaths. Looking just at initial stock allocations, the rising glidepaths
have an average value of 30% stocks, and the declining glidepaths have an
average value of 70% stocks. With the 2<sup>nd</sup> set of capital market
expectations, the success rate for the 4% rule with a fixed 30% stock
allocation is 51%, and the success rate is 66% for a fixed 70% stock
allocation.</span></span></div>
<div class="MsoNormal">
<br /></div>
<span style="font-size: small;"><span style="font-family: Verdana,sans-serif;">
</span></span><div class="MsoNormal">
<span style="font-size: small;"><span style="font-family: Verdana,sans-serif;">So our rising glidepaths have a severe hurdle to overcome,
especially in scenarios where the capital market assumptions are assumed to be
especially bad for bonds relative to stocks. Just having the rising equity glidepaths remain competitive on
these average success rate measures is a good sign, and while some investors
are very pessimistic about markets and might use those low capital market
assumptions, others are more optimistic about returns and the rising glidepaths
hold up even better in those environments.</span></span></div>
<div class="MsoNormal">
<br /></div>
<span style="font-size: small;"><span style="font-family: Verdana,sans-serif;">
</span></span><div class="MsoNormal">
<span style="font-size: small;"><span style="font-family: Verdana,sans-serif;">But the bottom line is that something close to the same
basic outcomes is being achieved with a collection of glidepaths using a lower
stock allocation. Risk averse retirees can feel much better now. Actually, this
really was our point all along. And saying that the rising equity glidepath
represents a more conservative strategy is not an indictment of rising equity
glidepaths; it was actually our <i>point</i>!</span></span></div>
<div class="MsoNormal">
<br /></div>
<span style="font-size: small;"><span style="font-family: Verdana,sans-serif;">
</span></span><div class="MsoNormal">
<span style="font-size: small;"><span style="font-family: Verdana,sans-serif;"><b>Magnitude of Failure</b></span></span></div>
<span style="font-size: small;"><span style="font-family: Verdana,sans-serif;">
</span></span><div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-size: small;"><span style="font-family: Verdana,sans-serif;">Next Jared looks at the magnitudes of failure.<span> </span>His second table actually shows support for
rising glidepaths. He shows that the magnitudes of failure (based on our own
data and results) are less severe with rising glidepaths in all three cases for
capital market expectations, and that all of these results are highly
statistically significant. Apparently unsatisfied with this conclusion, though,
he now brings up the issue that rising glidepaths have lower average stock
allocations, and suggests that perhaps the favorable results of the rising
glidepaths are simply being driven by the fact that they have lower average
stock allocations. Fine (since we actually made that point as well!). The
problem is that his next choice of regression is not an appropriate way to try
to conclude that it is <i>only</i> the lower
stock allocations that matter, and not the direction of the glidepath as well. </span></span></div>
<span style="font-size: small;"><span style="font-family: Verdana,sans-serif;">
</span></span><div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-size: small;"><span style="font-family: Verdana,sans-serif;">Even though he left Table 1 as is (which shows the
probabilities of success across the strategies, as analyzed earlier), despite
this issue of average stock allocations being different, he decides that we
cannot use Table 2 (which shows the same results as Table 1 but looks at
magnitudes of failure instead) because <i>now
</i>he is concerned the rising glidepaths have less stocks. To account for
this, he creates a regression model to see how the magnitude of failure relates
to two variables: the starting equity allocation and a dummy variable equal to
“1” if it’s a rising glidepath and “0” for declining glidepaths. Running this
regression suggests that it’s the initial stock allocation that matters, and
that the fact that one uses a rising equity glidepath provides a net negative
contribution to the results for one of the three sets of capital market
expectations (results are not significant in the other two cases). In other
words, this is where he really concludes that rising glidepaths are bad, and
any benefit we showed actually relates (in his view) only to the fact that the
retiree starts at a lower stock allocation, and not to what subsequent
glidepath is.</span></span></div>
<span style="font-size: small;"><span style="font-family: Verdana,sans-serif;">
</span></span><div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-size: small;"><span style="font-family: Verdana,sans-serif;">This regression is where we have the biggest disagreement with
Jared’s methodology. As indicated, his two variables are initial stock
allocation and whether it is a rising glidepath path or a declining glidepath. This
choice of variables effectively discards the important information about the
magnitude of changes in the glidepath. In other words, there is nothing in his
regression to distinguish the important difference between starting at 20%
stocks and ending at 30% stocks or ending at 100% stocks. There would be 10
rising glidepaths which start at 0% stocks, and there would be 10 declining
glidepaths which start at 100% stocks, and they all appear exactly the same in
his regression analysis. But they are not the same! He ignores the magnitude of
changes in the glidepath, which can be very material (in terms of both risk and
outcome).</span></span></div>
<span style="font-size: small;"><span style="font-family: Verdana,sans-serif;">
</span></span><div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-size: small;"><span style="font-family: Verdana,sans-serif;">The reason Jared set up the regression this way is because believes
that the initial stock allocation is the best available estimate for what the average
stock allocation will be for the whole retirement. While a portfolio that
glides from 30% in stock to 60% over 30 years would have an average allocation
of 45% over time, Jared emphasizes that if the portfolio is being spent down,
the <i>dollar-weighted </i>allocation will
be closer to 30% than 60% (or that it’s at least a close enough approximation
even though the dollar-weighted average will vary in each particular Monte
Carlo simulation). But we think it is a severe mistake to completely ignore information
we have about the magnitude of change in the glidepath. A 0% stock allocation which
ends at 10% stocks will not create the same experience for a retiree as a 0%
stock allocation that ends at 100% stocks. To say that both are equally well
represented by the fact that their initial allocation was 0% is insufficient
when one ends at 10% and the other ends at 100%. A proper regression model
should do something to account for this. </span></span></div>
<span style="font-size: small;"><span style="font-family: Verdana,sans-serif;">
</span></span><div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-size: small;"><span style="font-family: Verdana,sans-serif;">So how do we correct the problem? Well, we're not all that
enamored with this regression approach in the first place. The number of
datapoints is somewhat artificial based on the fact that we looked at the
glidepaths in 10 percentage point increments. There would have been 15 rising
glidepaths if we used 20 percentage point increments, and there would have been
5,050 rising glidepaths if we used 1 percentage point increments, creating
strange artificial thresholds to finding significance in the first place. That
being said, I think it is still fair to overweight the initial equity
allocation (as with a portfolio that spends down, the dollar-weighted
allocation <i>will </i>be closer to the
starting percentage than the ending), but let’s also do something to avoid
wasting the information about how quickly the glidepath changes. For example,
we could let the regression variable be equal to:</span></span></div>
<div class="MsoNormal">
<br /></div>
<span style="font-size: small;"><span style="font-family: Verdana,sans-serif;">
</span></span><div class="MsoNormal">
<span style="font-size: small;"><span style="font-family: Verdana,sans-serif;">0.7 * starting equity allocation<span> </span>+<span> </span>0.3
* ending equity glidepath</span></span></div>
<span style="font-size: small;"><span style="font-family: Verdana,sans-serif;">
</span></span><div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-size: small;"><span style="font-family: Verdana,sans-serif;">This is still reflecting the importance of the initial stock
allocation, but it is also letting the changes in glidepath play a role as
well. I simply can’t understand why Jared believes that <i>only</i> considering the initial stock allocation is a better way to
investigate this. We can re-run the regression with this new variable, and then
we can look at the coefficient on the dummy variable and decide about the
rising glidepath.<span> </span>Here is our version of
his third table in which we use this new variable better reflecting the average
stock allocation over the retirement:</span></span></div>
<div class="MsoNormal">
<br /></div>
<span style="font-size: small;"><span style="font-family: Verdana,sans-serif;">
</span></span><table border="1" cellpadding="0" cellspacing="0" class="MsoTableGrid" style="border-collapse: collapse; border: medium none;">
<tbody>
<tr>
<td style="border: 1pt solid windowtext; padding: 0in 5.4pt; width: 159.6pt;" valign="top" width="213">
<div class="MsoNormal" style="line-height: normal; margin-bottom: 0.0001pt;">
<br /></div>
</td>
<td style="-moz-border-bottom-colors: none; -moz-border-left-colors: none; -moz-border-right-colors: none; -moz-border-top-colors: none; border-color: windowtext windowtext windowtext -moz-use-text-color; border-image: none; border-style: solid solid solid none; border-width: 1pt 1pt 1pt medium; padding: 0in 5.4pt; width: 159.6pt;" valign="top" width="213">
<div class="MsoNormal" style="line-height: normal; margin-bottom: 0.0001pt;">
<span style="font-size: small;"><span style="font-family: Verdana,sans-serif;">Dummy Variable Coefficient</span></span></div>
</td>
<td style="-moz-border-bottom-colors: none; -moz-border-left-colors: none; -moz-border-right-colors: none; -moz-border-top-colors: none; border-color: windowtext windowtext windowtext -moz-use-text-color; border-image: none; border-style: solid solid solid none; border-width: 1pt 1pt 1pt medium; padding: 0in 5.4pt; width: 159.6pt;" valign="top" width="213">
<div class="MsoNormal" style="line-height: normal; margin-bottom: 0.0001pt;">
<span style="font-size: small;"><span style="font-family: Verdana,sans-serif;">t-stat</span></span></div>
</td>
</tr>
<tr>
<td style="-moz-border-bottom-colors: none; -moz-border-left-colors: none; -moz-border-right-colors: none; -moz-border-top-colors: none; border-color: -moz-use-text-color windowtext windowtext; border-image: none; border-right: 1pt solid windowtext; border-style: none solid solid; border-width: medium 1pt 1pt; padding: 0in 5.4pt; width: 159.6pt;" valign="top" width="213">
<div class="MsoNormal" style="line-height: normal; margin-bottom: 0.0001pt;">
<span style="font-size: small;"><span style="font-family: Verdana,sans-serif;">Capital Market Expectations I</span></span></div>
</td>
<td style="border-color: -moz-use-text-color windowtext windowtext -moz-use-text-color; border-style: none solid solid none; border-width: medium 1pt 1pt medium; padding: 0in 5.4pt; width: 159.6pt;" valign="top" width="213">
<div class="MsoNormal" style="line-height: normal; margin-bottom: 0.0001pt;">
<span style="font-size: small;"><span style="font-family: Verdana,sans-serif;">4.2</span></span></div>
</td>
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<div class="MsoNormal" style="line-height: normal; margin-bottom: 0.0001pt;">
<span style="font-size: small;"><span style="font-family: Verdana,sans-serif;">7.6</span></span></div>
</td>
</tr>
<tr>
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<div class="MsoNormal" style="line-height: normal; margin-bottom: 0.0001pt;">
<span style="font-size: small;"><span style="font-family: Verdana,sans-serif;">Capital Market Expectations II</span></span></div>
</td>
<td style="border-color: -moz-use-text-color windowtext windowtext -moz-use-text-color; border-style: none solid solid none; border-width: medium 1pt 1pt medium; padding: 0in 5.4pt; width: 159.6pt;" valign="top" width="213">
<div class="MsoNormal" style="line-height: normal; margin-bottom: 0.0001pt;">
<span style="font-size: small;"><span style="font-family: Verdana,sans-serif;">2.6</span></span></div>
</td>
<td style="border-color: -moz-use-text-color windowtext windowtext -moz-use-text-color; border-style: none solid solid none; border-width: medium 1pt 1pt medium; padding: 0in 5.4pt; width: 159.6pt;" valign="top" width="213">
<div class="MsoNormal" style="line-height: normal; margin-bottom: 0.0001pt;">
<span style="font-size: small;"><span style="font-family: Verdana,sans-serif;">4.2</span></span></div>
</td>
</tr>
<tr>
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<div class="MsoNormal" style="line-height: normal; margin-bottom: 0.0001pt;">
<span style="font-size: small;"><span style="font-family: Verdana,sans-serif;">Capital Market Expectations III</span></span></div>
</td>
<td style="border-color: -moz-use-text-color windowtext windowtext -moz-use-text-color; border-style: none solid solid none; border-width: medium 1pt 1pt medium; padding: 0in 5.4pt; width: 159.6pt;" valign="top" width="213">
<div class="MsoNormal" style="line-height: normal; margin-bottom: 0.0001pt;">
<span style="font-size: small;"><span style="font-family: Verdana,sans-serif;">5.9</span></span></div>
</td>
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<span style="font-size: small;"><span style="font-family: Verdana,sans-serif;">Again, we're not so excited about this regression approach in
the first place, but in the context of how Jared presented his results, this table
shows overwhelming evidence in favor of rising equity glidepaths. The
coefficients on the rising glidepath dummy are all positive, suggesting that
once we control for our approximation of the average stock allocation over retirement,
rising glidepaths give substantially better results in terms reducing the
magnitude of failure, relative to declining glidepaths. In addition, those
t-statistics are quite large, suggesting that the results are all highly
statistically significant. This table is very good news for rising glidepaths.</span></span></div>
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<span style="font-size: small;"><span style="font-family: Verdana,sans-serif;">The important difference, and why this regression is better
than the one Jared used, is that this regression also allows the degree of
change in the glidepath to play a role as well. As we explained before, Jared’s
approach threw away too much information because it only used the starting
equity allocation. </span></span></div>
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<span style="font-size: small;"><span style="font-family: Verdana,sans-serif;">Beyond that, it’s also worth noting once again that we can
view the fact that the rising equity glidepath is a path to starting with a
more conservative portfolio is <i>also </i>a
benefit of implementing the glidepath strategy itself. Continuing the earlier
example of analyzing the benefits of using DFA funds, a Kizer-style regression
analysis on DFA fund holdings might easily find that DFA funds are disproportionately
tilted towards small-cap and value stocks (which isn’t surprising, as DFA’s
philosophy is to implement the small-cap and value tilts of the Fama/French
three-factor model). By Kizer’s methodology, this implies that using DFA funds
has no benefit, because the actual benefits are simply a result of the small-cap
and value tilts, not recognizing that the whole point <i>of </i>using DFA funds was to implement those exact tilts in the first
place. In addition, while DFA’s beneficial results might<i> </i>be dominated by their small-cap and value tilts, they arguably
provide some value in their particular implementation of the strategy as well, yet
it clearly seems too narrow to suggest that DFA’s <i>only </i>benefit is the way they invest the tilts and not the fact that
they decided to apply the tilts in the first place. Similarly, while we’d
actually concur that a significant (though not exclusive) factor of the rising
equity glidepath is that its initial equity weighting is lower, the path of the
glidepath itself over time does matter too, and the overall value of the
strategy is not <i>just </i>about the path
of the glidepath but also the fact that it creates a framework to make it
acceptable to own that lower initial equity allocation in the first place!</span></span></div>
Anonymoushttp://www.blogger.com/profile/04168922717655562721noreply@blogger.com2tag:blogger.com,1999:blog-6167053228142922997.post-77028468132721918072014-09-17T10:47:00.000-04:002014-09-17T10:47:39.281-04:00Retirement Risk, Rising Equity Glidepaths, and Valuation-Based Asset Allocation<span style="font-size: small;"><span style="font-family: Verdana,sans-serif;"><br />Michael Kitces and I have completed a new research article called, <a href="http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2497053" target="_blank">"Retirement Risk, Rising Equity Glidepaths, and Valuation-Based Asset Allocation."</a> It's now available as a working paper at SSRN. </span></span><br />
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<span style="font-size: small;"><span style="font-family: Verdana,sans-serif;">This morning, as well, Michael has <a href="http://www.kitces.com/blog/valuation-based-tactical-asset-allocation-in-retirement-and-the-impact-of-market-valuation-on-declining-and-rising-equity-glidepaths/" target="_blank">written a detailed overview</a> of the research at his Nerd's Eye View blog. A funny point about that. With our last article, I think a lot of people became familiar with it from Michael's blog post. Twice now, I've been speaking to groups of financial planners, and someone has asked me if I'm aware of the recent research about rising equity glidepaths in retirement. Everyone gets a good laugh as I awkwardly answer that I am aware of the research, since I'm actually one of its co-authors.</span></span><br />
<br />
<span style="font-size: small;"><span style="font-family: Verdana,sans-serif;">In order to avoid overlapping too much with Michael's excellent overview, let me take a different angle in an attempt to summarize this new research article. It all begins with sequence risk, which is the idea that even if the average market return is decent, retirees are especially vulnerable to the impact of bad market returns in the early part of their retirement. Sequence risk is uniquely caused by the attempt to (1) spend a constant amount each year from (2) a volatile investment portfolio. Sequence risk can be dampened by either letting spending fluctuate or by reducing portfolio volatility. For this research, we are focused on the 'reducing portfolio volatility' side of the equation.</span></span><br />
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<span style="font-size: small;"><span style="font-family: Verdana,sans-serif;">Outside of just using a low equity allocation throughout retirement (which leads to its own sets of risks in terms of potentially being locked out of any possibility to meet one's spending goals), we can identify three major ways to reduce portfolio volatility when it counts the most:</span></span><br />
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<span style="font-size: small;"><span style="font-family: Verdana,sans-serif;"><b>(1) rising equity glidepath:</b> reduces portfolio volatility in the pivotal years near the retirement date when a retiree is most vulnerable to losing the most dollars of wealth with a given market drop. People are most vulnerable and have the most at stake when their wealth is the largest. </span></span><br />
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<span style="font-size: small;"><span style="font-family: Verdana,sans-serif;"><b>(2) valuation-based asset allocation:</b> reduces the stock allocation when the portfolio is the most vulnerable to experiencing a big decline in value, which historically has happened when Robert Shiller's cyclically-adjusted price earnings ratio has risen to levels well above its average (i.e. 1929, the mid-1960s, and 2000). </span></span><br />
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<span style="font-size: small;"><span style="font-family: Verdana,sans-serif;"><b>(3) funded ratio:</b> Reduces portfolio volatility when the retiree has enough assets to just get by with meeting their retirement spending goals using a low-volatility portfolio. Once the retiree has excess 'discretionary' wealth beyond what is needed to safely lock in their goals, that's when they can invest more aggressively with a volatile portfolio. In other words, reduce volatility when you are most vulnerable to a transition from being able to meet your goals to not being able to meet your goals.</span></span><br />
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<span style="font-size: small;"><span style="font-family: Verdana,sans-serif;">This new research focuses more on the interplay between using different glidepaths and using valuation-based asset allocation. </span></span><br />
<span style="font-size: small;"><span style="font-family: Verdana,sans-serif;"><br /></span></span>
<span style="font-size: small;"><span style="font-family: Verdana,sans-serif;">We clarify that the rising equity glidepath does not necessarily have to be used as a universal situation. However, today's investing environment does reflect the circumstances when the rising glidepath is most useful. That is, the stock market is overvalued and is more vulnerable to a significant drop. This is when the rising glidepath works best: it lowers the stock allocation to help guide through the environment when the retiree is most vulnerable to a market drop, and presuming such a drop happens at some point, it will then be shifting to a higher stock allocation later in retirement when markets are more fairly valued. In other words, it approximates a valuation-based asset allocation strategy.</span></span><br />
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<span style="font-size: small;"><span style="font-family: Verdana,sans-serif;">When markets are not overvalued, which does <u>not</u> reflect the situation today, then retirees might look more carefully at just holding a higher stock allocation, or at using a valuation-based asset allocation strategy. If markets are undervalued, the traditional type of declining equity glidepath in retirement can actually look more attractive, as it provides a closer proxy to what would be done with a valuation-based strategy.</span></span><br />
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<span style="font-size: small;"><span style="font-family: Verdana,sans-serif;">In conclusion, in today's overvalued market environment, retirees can reduce their vulnerable to the effects of a big drop in the stock market by using a lower equity allocation. This can be accomplished either by using a pre-set rising equity glidepath (as an inverse of what today's target date funds do for the pre-retirement period), a valuation-based strategy, or even a combined rising equity glidepath with a valuations overlay. This is the subject of our <a href="http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2497053" target="_blank">new article at SSRN</a>. </span></span><br />
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<br />Anonymoushttp://www.blogger.com/profile/04168922717655562721noreply@blogger.com8tag:blogger.com,1999:blog-6167053228142922997.post-1721910443642961112014-09-16T16:43:00.000-04:002014-09-16T16:43:28.153-04:00Updates on Recent Articles<span style="font-size: small;"><span style="font-family: Verdana,sans-serif;">The blog been quiet recently, but it's not been because of a lack of things to talk about. It's just, once you're out of a routine, it's tough to get back into it. And I've been keeping busy with a lot of new research projects. I might actually have a full schedule of blog posts for the rest of the week to discuss some of this recent research that's now actually getting to the stage of going public. </span></span><br />
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<span style="font-size: small;"><span style="font-family: Verdana,sans-serif;">To get things started, let me provide an update on some recent columns I've written at different places around the Internet, as well as a note about a webinar I will participate in on Thursday.</span></span><br />
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<b><span style="font-size: small;"><span style="font-family: Verdana,sans-serif;">Now is a Tough Time to Retire</span></span></b><br />
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<span style="font-size: small;"><span style="font-family: Verdana,sans-serif;">In the column, <a href="http://www.fa-mag.com/news/now-is-a-tough-time-to-retire-18978.html" target="_blank">"Now is a Tough Time to Retire,"</a> at <i>Financial Advisor </i>magazine, I write about a question I am commonly asked, which is whether it is a bad time to purchase an income annuity or buy individual bonds because interest rates are low. My answer is: not necessarily, relatively speaking. More generally, it's a tough time to retire as everything is expensive. Income annuities are not necessarily worse position </span></span><span style="font-size: small;"><span style="font-family: Verdana,sans-serif;"><span style="font-size: small;"><span style="font-family: Verdana,sans-serif;">than other approaches </span></span>in our low interest rate and high market valuation world. </span></span><br />
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<span style="font-size: small;"><span style="font-family: Verdana,sans-serif;"><b>The Power and Limitations of Monte Carlo Simulations</b></span></span><br />
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<span style="font-size: small;"><span style="font-family: Verdana,sans-serif;"><span style="font-size: small;"><span style="font-family: Verdana,sans-serif;">David
Blanchett and I have written a two-part series about Monte Carlo
simulations for financial planning (and a third part is on the way) at <i>Advisor Perspectives</i>. The first article, <a href="http://www.advisorperspectives.com/newsletters14/The_Power_and_Limitations_of_Monte_Carlo_Simulations.php" target="_blank">"The Power and Limitations of Monte Carlo Simulations"</a> provides a discussion about how Monte Carlo simulations are used in financial planning software. We consider some common critiques about Monte Carlo, and whether these critiques are justified. We also highlight important advantages obtained from a Monte Carlo approach relative to other straightline types of methods. </span></span></span></span><br />
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<span style="font-size: small;"><span style="font-family: Verdana,sans-serif;"><b>Can Retirees Still Use a 4% Withdrawal Rate? Practical Applications of Monte Carlo Analysis </b></span></span><br />
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<span style="font-size: small;"><span style="font-family: Verdana,sans-serif;">The second part in this series from David and I is called, <a href="http://www.advisorperspectives.com/newsletters14/Can_Retirees_Still_Use_a_4percent_Withdrawal_Rate.php" target="_blank">"Can Retirees Still Use a 4% Withdrawal Rate? Practical Applications of Monte Carlo Analysis."</a> It provides a discussion of different issues and applications related to using Monte Carlo for retirement planning analysis. We conclude that Monte Carlo provides a more flexible tool for retirement income planning than looking at what would have worked in rolling periods from the historical data.</span></span><br />
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<span style="font-size: small;"><span style="font-family: Verdana,sans-serif;"><b>Is the 4 Percent Rule Too Low or Too High?</b></span></span><br />
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<span style="font-size: small;"><span style="font-family: Verdana,sans-serif;">The topic of the column, <a href="https://www.onefpa.org/journal/Pages/AUG14-Is-the-4-Percent-Rule-Too-Low-or-Too-High.aspx" target="_blank">"Is the 4 Percent Rule Too Low or Too High?" </a>from the <i>Journal of Financial Planning</i> should be somewhat familiar to readers here, as I've discussed it before. But this column represents my attempt to summarize and distill some key issues into a short column. I've re-written lots of portions from past discussions at the blog.</span></span><br />
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<span style="font-size: small;"><span style="font-family: Verdana,sans-serif;"><b>Mr. Money Mustache</b></span></span><br />
<span style="font-size: small;"><span style="font-family: Verdana,sans-serif;"><b><br /></b></span></span>
<span style="font-size: small;"><span style="font-family: Verdana,sans-serif;">I would be remiss not to mention that one of my favorite bloggers, Mr. Money Mustache, actually included a research question for me to explore in a recent <a href="http://www.mrmoneymustache.com/2014/08/20/how-to-invest-in-overvalued-market/" target="_blank">blog post</a>. It's actually a really good question, and I've got it on my to-do list. The issue is that because of the equity risk premium, generally if one is given a choice in the matter, it will be better to invest the full lump-sum amount all at once, rather than dollar cost averaging the wealth into the markets over time. This maximizes the amount of time that the wealth is exposed to the market. Mr. Money Mustache ponders whether this will continue to hold even when market valuations are at historically high levels, such as today. I'll plan to take a look at this.</span></span><br />
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<span style="font-size: small;"><span style="font-family: Verdana,sans-serif;"><b>Saving for Retirement: Am I On Track?</b></span></span><br />
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<span style="font-size: small;"><span style="font-family: Verdana,sans-serif;">Regarding the webinar, Paula Friedman and I will do a joint presentation called,
"Saving for Retirement: Am I On Track?" It's actually a very
introductory presentation for people just getting started with investing and saving. Paula is director of encore401(k) at McLean
Asset Management, and she will discuss some of the basics around saving
and investing which she also shares with plan participants in 401(k)
plans. I'll join in to discuss "safe savings rates," as a way to
approach the retirement planning problem from the perspective of someone
who does not wish to spend a lot of time thinking about finance and
investments. Given some basic information about your situation, the idea
of safe savings rates is to let you know how much you should be saving
to have a good shot at achieving your retirement spending goals.</span></span><br />
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<span style="font-size: small;"><span style="font-family: Verdana,sans-serif;"><span style="color: #584939;">To register for this event, please go to:</span></span></span></div>
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<span style="font-size: small;"><span style="font-family: Verdana,sans-serif;"><span style="color: #584939;">Registration URL:</span><span style="color: black;">
<a href="http://r20.rs6.net/tn.jsp?f=001agTamINroMvVJGv0Uz-KSoCbxbyyvqLhoqdPjWWETBhXWATFqE0b8Sd3psXm-UkwyMbpVeHsAbGa0OKAL23wfJ4_MF_XdVJ-HMmrKg1E6NDlRlarq9wakSGlBn5Ushc0Sd4TTd2nPeekBAT5oVCYfvzwvnh9Ta26XZrPVqaJ18S1sYPfW314UM5qCL7I0DroG-xrI0zmHWis1G0NdlStSJrKeRPZ3DMf&c=Jp_qWB6NhiGVLxiqz3_i6BdqM9dU7hnay9sB6ThHxTCF-oxJ9JKJzQ==&ch=fZ1yOZ_DVB5tT9hAqxhPBdiHBjYQh-9yie5LHy4Dpin2fB-iurnXBQ==" target="_blank">
https://attendee.gotowebinar.<wbr></wbr>com/register/<wbr></wbr>291179626751160833</a></span></span></span></div>
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<span style="font-size: small;"><span style="font-family: Verdana,sans-serif;"><span style="color: #584939;">Webinar ID: 128-747-283 </span><span style="color: black;"></span></span></span></div>
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<span style="color: #584939;">Date/Time: <span class="aBn" data-term="goog_1514261118" tabindex="0"><span class="aQJ">September 18, 2014 at 1:00 -2:00 PM EDT</span></span>.
</span></span></span>Anonymoushttp://www.blogger.com/profile/04168922717655562721noreply@blogger.com4tag:blogger.com,1999:blog-6167053228142922997.post-80654407385650308812014-08-27T22:32:00.003-04:002014-08-27T22:32:40.733-04:00Alex Murguia - Quality Control of Financial Planning webinar<div class="MsoNormal" style="background-color: white; color: #222222; margin: 0in 0in 0.0001pt;">
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<span style="font-family: Verdana, sans-serif;">I'm passing on a message for advisors from Alex Murguia of McLean Asset Management and inStream Solutions:</span></div>
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<span style="font-family: Verdana, sans-serif;">Calling all advisors!<u></u><u></u></span></div>
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<span style="font-family: Verdana, sans-serif;">I need your help. On <span class="aBn" data-term="goog_459844617" style="border-bottom-color: rgb(204, 204, 204); border-bottom-style: dashed; border-bottom-width: 1px; position: relative; top: -2px; z-index: 0;" tabindex="0"><span class="aQJ" style="position: relative; top: 2px; z-index: -1;">September 10th</span></span>, I will presenting a TED style talk at Bob Veres' Insider’s Forum conference on "Quality Control of financial planning." The topic addresses what I feel is the next big hurdle and a significant value proposition that advisors are facing in our evolving profession. <u></u><u></u></span></div>
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<span style="font-family: Verdana, sans-serif;">In much the same way that advisors have operationalized their investment management services for clients through the use of model portfolios and technology (e.g., i-Rebal & Orion) over the last 10 years, we have only begun to tackle the institutional delivery of financial planning advice. The Implications of this range from how you provide a consistent level of planning advice across your client segments and advisors. <u></u><u></u></span></div>
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<span style="font-family: Verdana, sans-serif;">While I have a good sense of the agenda, I realize that I belong to only one firm. I would appreciate your help in sharing your thoughts with me as I preview my "working" presentation. I have set up an interactive webinar on <a href="https://www3.gotomeeting.com/register/231530158" style="color: #1155cc;" target="_blank"><span style="text-decoration: none;">Wednesday September 3 at 3:00 PM Eastern</span></a> in preparation for the TED style Talk at Insiders Forum. I would very much value your input. <u></u><u></u></span></div>
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<span style="font-family: Verdana, sans-serif;">Thanks in advance for your help,</span></div>
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<span style="font-family: Verdana, sans-serif;">Alex Murguia</span></div>
Anonymoushttp://www.blogger.com/profile/04168922717655562721noreply@blogger.com0tag:blogger.com,1999:blog-6167053228142922997.post-80806787890714467152014-07-23T12:52:00.000-04:002014-07-23T12:52:59.258-04:00July 29: Educational Webinar on Bond Prices and Interest Rates<span style="font-size: small;"><span style="font-family: Verdana,sans-serif;">A side project which I have worked on in recent months is a <a href="http://ari.cloudapp.net/BondCalculator" target="_blank">bond calculator</a> for the Annexus Research Institute. This calculator allows users to explore the relationship between interest rates and bond prices. On the left-hand side of the calculator, one can calculate the market price for an existing bond based on its characteristics and current interest rates. On the right-hand side of the calculator, one can explore the impact of future interest rate changes on the bond price. </span></span><br />
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<span style="font-size: small;"><span style="font-family: Verdana,sans-serif;">Bond prices are inversely related to interest rates. If interest rates increase, the prices for existing bonds will decrease so that the yield to maturity earned by anyone purchasing an existing bond would match the yields available on new bonds at the higher market interest rate. The calculator allows users to explore this relationship with realistic bond examples of their choosing.<br /><br />Rex Voegtlin of the Annexus Research Institute has written a white paper to accompany the calculator, and he has also developed an educational webinar about the relationship between interest rates and bond prices. Anyone is welcome to sign up for this webinar,<a href="http://pages.annexusgroup.com/RexsJulyWebinar2014_WebinarwithGTW_Rex-Webinar-June_ARI-Rex-Registration-Page.html?mkt_tok=3RkMMJWWfF9wsRomrfCcI63Em2iQPJWpsrB0B%2FDC18kX3RUvIruefkz6htBZF5s8TM3DVVpDXrRJ60ENSrk%3D" target="_blank">"The Bond Dynamic of 2014: What Every Successful Advisor Must Know."</a> The webinar is on Tuesday, July 29 from 3 PM to 4 PM Eastern time. I am not the presenter for the webinar, but I will be in attendance and will be available to answer questions at the end of the webinar.<br /><br />Though designed for financial advisors, anyone is welcome to attend. When you sign-up there are a series of questions to answer. For those who are not advisors, you can provide the answers seen below as part of signing up:<br /><br />* First Name (obvious)<br /><br />* Last Name (obvious)<br /><br />* Email Address (obvious)<br /><br />* Company Name (obvious)<br /><br />* Who is your Internal Marketer/Contact? Brian<br /><br />* Who is your Annexus IMO? Annexus<br /><br />* Please Type In Your Agent Number? Pending<br /><br />* Are You a Registered Rep? Yes or No<br /><br /> </span></span>Anonymoushttp://www.blogger.com/profile/04168922717655562721noreply@blogger.com2tag:blogger.com,1999:blog-6167053228142922997.post-21783923350796344342014-07-16T03:44:00.001-04:002014-07-16T03:44:23.394-04:00From Dirk Cotton's The Retirement Cafe: Half Right<span style="font-family: Verdana, sans-serif;">Dirk Cotton recently made an excellent post which provides further background descriptions about what I was doing in a recent <i>Advisor Perspectives</i> column about using Monte Carlo simulations to get conservative return assumptions. Dirk's post is <a href="http://theretirementcafe.blogspot.com/2014/07/half-right.html?spref=bl">The Retirement Cafe: Half Right</a>. It's also worthwhile to check his comment section.</span>Anonymoushttp://www.blogger.com/profile/04168922717655562721noreply@blogger.com3tag:blogger.com,1999:blog-6167053228142922997.post-85901891286514628292014-07-07T20:08:00.001-04:002014-07-07T20:08:33.780-04:00Two Views on the 4% Rule<span style="font-family: Verdana, sans-serif;">I've got a short new column at MarketWatch's RetireMentors called, <a href="http://www.marketwatch.com/story/retirement-2-different-views-on-the-4-rule-2014-07-07" target="_blank">"Retirement: Two Different Views on the 4% Rule."</a></span><br />
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<span style="font-family: Verdana, sans-serif;">The first view is the standard Bengen, Trinity-study approach of basing safe withdrawal rates on historical worst-case scenarios.</span><br />
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<span style="font-family: Verdana, sans-serif;">The second view is the one I ascribe to, which is that current market conditions are much better indicators of what will be sustainable than historical worst-case scenarios. Historically, Shiller's PE10 has done a good job explaining sustainable withdrawal rates.</span><br />
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<span style="font-family: Verdana, sans-serif;">This second view is easy to misunderstand. I'm saying that with it, 4.2% is the best guess about the actual sustainble withdrawal rate for current retirees. It's not a safe withdrawal rate. The safe withdrawal rate would be less.</span><br />
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<span style="font-family: Verdana, sans-serif;">This short column didn't incorporate bond yields, which are also good indicators about sustainable withdrawal rates. The fact that bond yields are at historic lows also suggests that we will end up on the low side of that 4.2% guess.</span>Anonymoushttp://www.blogger.com/profile/04168922717655562721noreply@blogger.com15tag:blogger.com,1999:blog-6167053228142922997.post-49809506339424534852014-07-01T10:44:00.001-04:002014-07-01T10:44:42.474-04:00New Research on How to Choose Portfolio Return Assumptions<span style="font-size: small;"><span style="font-family: Verdana,sans-serif;">Monte Carlo simulation is a popular tool for projecting a lifetime financial plan. When using Monte Carlo with a low failure rate, an underlying implication is that one is implicitly using a lower portfolio return assumption in order to have a plan that works in most any market environment. The plan has to work in poor market environments as well to get a high success rate. It must work even when the underlying compounded portfolio returns are low. But the portfolio return sequences are not usually seen as part of the output from Monte Carlo, and so this point may be missed. <br /><br />An alternative to Monte Carlo analysis is to develop a spreadsheet with a single number for the portfolio return in order to create projections for a lifetime financial plan. In many cases, the default way to approach this is to plug in what one things to be the average or expected rate of return over the long-term horizon. The problem is that using the "expected" return is the equivalent of accepting a 50% failure rate with Monte Carlo analysis. A conservative projection will require a lower rate of return assumption.<br /><br />This is one of the themes of my July column at <i>Advisor Perspectives</i>, <a href="http://www.advisorperspectives.com/newsletters14/How_to_Choose_Portfolio_Return_Assumptions.php" target="_blank">"New Research on How to Choose Portfolio Return Assumptions."</a><br /><br />The other related theme is that when developing portfolio return assumptions for a spreadsheet about a retirement plan, it is important to make further reductions to the rate of return in order to maintain the same overall probability of success. This is because of sequence of returns risk. The increased vulnerability to the returns experienced in the early part of retirement will create greater variation for the internal rates of return over a 30 year period than one would get from just investing a lump-sum amount for 30 years. These differences are further compounded if one considers that risk capacity will be less after retiring, leaving one feeling compelled to use a safer percentile from the distribution of outcomes (i.e. one might feel comfortable using the 25th percentile during accululation, but only the 5th or 10th percentile in retirement). <br /><br />For the example I give in the article, if one believes that the expected arithmetic real portfolio return is 5.6% with a volatility of 11%, the implied compounded portfolio return with a 90% chance for success for someone retired and sustaining withdrawals from their portfolio is only 1.9%. If investing a lump-sum, the assumed return could have been 2.5%. For high confidence about retirement success, the financial plan would need to work even if their wealth only grew at this rather low rate of return. Plugging in an "expected" return would expose someone to a coin flip about their retirement success.</span></span>Anonymoushttp://www.blogger.com/profile/04168922717655562721noreply@blogger.com21tag:blogger.com,1999:blog-6167053228142922997.post-92098852068752241322014-06-30T12:40:00.000-04:002014-06-30T12:40:23.746-04:00Guyton and Kitces with Continued Discussions on Safe Withdrawal Rates and Spending Decision Rules<span style="font-size: small;"><span style="font-family: Verdana,sans-serif;">Today we’ll continue the master course on systematic withdrawals with Michael Kitces and Jonathan Guyton. This post is a follow-up from a <a href="http://wpfau.blogspot.com/2014/06/kitces-and-guyton-on-three-approaches.html" target="_blank">previous popular post</a> in which Michael and Jonathan describe systematic withdrawals, time segmentation, and essentials vs. discretionary spending in retirement. </span></span><br />
<span style="font-size: small;"><span style="font-family: Verdana,sans-serif;"><br />These video interviews are from the <a href="http://retirement.theamericancollege.edu/" target="_blank">New York Life Center for Retirement Income</a> at The American College, and all of these videos are included in curriculum for the <a href="http://www.theamericancollege.edu/financial-planning/ricp-retirement-income-planning" target="_blank">Retirement Income Certified Professional (RICP) designation</a> for financial advisors.<br /><br />In this video, Jonathan Guyton and Michael Kitces discuss further about systematic withdrawals and safe withdrawal rates. Michael explains the origins of William Bengen’s initial research on the 4% rule. They also discuss the potential upside from using the 4% rule, the inclusion of additional asset classes, the role of market valuations in guiding the initial sustainable withdrawal rate, and the impact of variable spending on the safe withdrawal rate. Michael reminds that the 4% rule was never meant to be an autopilot guide to sustainable spending over 30 years. All of these factors suggest that spending could be higher than what is defined as a classical safe withdrawal rate. Michael also discusses the idea of the safe withdrawal rate setting a “floor” for spending, though this is a controversial statement (to say the least) for many advocates of floor-and-upside approaches, with the point being that investments designed to support a floor should not be invested in the stock market. Michael is describing the floor as supported by conservative spending instead of conservative investments, but the question remains about whether any spending rate is conservative enough when investing in a volatile portfolio.<br /><br />
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<span style="font-size: small;"><span style="font-family: Verdana,sans-serif;">In the next video, Jonathan Guyton discusses his research on using decision rules to guide withdrawals in response to portfolio performance when using a systematic withdrawal strategy. This involves a willingness to deviate from the standard assumption of inflation-adjusted spending. Adjusting spending for inflation will continue to be the norm, in order to smooth the spending path as much as possible, but his predetermined decision rules will guide retirees about when it is appropriate to make spending adjustments. The 4% rule applies only to the spending percentage in the first year of retirement. In subsequent years, the spending amount adjusts for inflation, and what this represents as a percentage of remaining assets in the portfolio will fluctuate over time. Guyton’s idea was to create guardrails on spending: cut spending by 10% if the current withdrawal rate (this year’s withdrawal divided by this year’s portfolio balance) increases by 20% from its initial level, and increase spending by 10% when the current withdrawal rate falls by more than 20% from its initial level. As well, an important implication of the research is that with a willingness to cut spending when markets underperform, it is possible to increase the initial spending rate above whatever has been determined as safe for constant inflation-adjusted withdrawals. The intuition for this is that cutting spending when the portfolio is down reduces some of the sequence of returns risk facing retirees using a volatile investment portfolio. </span></span><br />
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<span style="font-size: small;"><span style="font-family: Verdana,sans-serif;">For readers receiving this through email, please click on the post title to get to my blog. The videos are at the blog, but they don't show up in email. </span></span><br />
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<span style="font-size: small;"><span style="font-family: Verdana,sans-serif;">I recently read the short and simple book, <i>The 3 Simple Rules of Investing</i>, by Michael Edesess, Kwok L. Tsui, Carol Fabbri, and George Peacock. Michael Edesess is a friend, and this book deserves a longer review. It includes a lot of interesting insights into basic problems or misinterpretations with a number of published and well-cited academic finance articles. But I realize that I will probably never get around to writing such a review.</span></span><br />
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<span style="font-size: small;"><span style="font-family: Verdana,sans-serif;">Instead, let me share a few slides excerpted from a presentation I recently prepared and gave to an audience of individuals who are still in the process of learning about the basics of investing. It was not my usual audience, and this book came in very helpful in cutting down investing to its essence. In particular, I really liked how the book reduced the retirement income investment problem into considering allocations to three basic sources: the world stock index fund, a ladder of individual bonds (preferably TIPS), and income annuities. It can really be that simple.</span></span><br />
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<span style="font-size: small;"><span style="font-family: Verdana,sans-serif;">Here are the excerpted slides which tell the basic story from the book in a way that I found very helpful as an educational tool:</span></span><br />
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<br />Anonymoushttp://www.blogger.com/profile/04168922717655562721noreply@blogger.com4tag:blogger.com,1999:blog-6167053228142922997.post-61323814735473503922014-06-18T12:12:00.000-04:002014-06-18T12:12:30.853-04:00Kitces and Guyton on the Three Approaches for Retirement Income Planning<span style="font-size: small;"><span style="font-family: Verdana,sans-serif;">Jonathan Guyton and Michael Kitces are both leading advocates of systematic withdrawal strategies for retirement, which involve investing a portfolio using a total returns perspective and having a withdrawal strategy in place to spend down the portfolio sustainably over retirement. This approach is also known as 'safe withdrawal rates.' </span></span><br />
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<span style="font-size: small;"><span style="font-family: Verdana,sans-serif;">In the following video from the New York Life Center for Retirement Income at The American College, they discuss systematic withdrawals, as well as time segmentation and essentials-vs.-discretionary.</span></span><br />
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<span style="font-size: small;"><span style="font-family: Verdana,sans-serif;">As academics tend to favor approaches related more closely to essentials-vs.-discretionary, it is somewhat uncommon to hear rigorous intellectual defenses of systematic withdrawals. Guyton and Kitces do an admirable job in this video, making it relevant for individuals on both sides of the debate. They defend systematic withdrawals, and they focus particularly on explaining why they think time segmentation and essentials-vs.-discretionary are not better solutions. </span></span><br />
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Anonymoushttp://www.blogger.com/profile/04168922717655562721noreply@blogger.com21tag:blogger.com,1999:blog-6167053228142922997.post-55589013958355200792014-06-06T15:02:00.000-04:002014-06-09T16:38:15.700-04:00Two Webinars in June<span style="font-size: small;"><span style="font-family: Verdana,sans-serif;">As I mentioned in my last post, I will be presenting two follow-up free webinars during June as a part of Watermark Adviser Solutions. I've got an updated presentation on Safe Savings Rates to present on June 18, and on June 26 I'll use the same slides as the May 20 webinar in order to continue where I left off before with exploring ways to reduce sequence of returns risk in retirement. Anyone is welcome to attend, but please understand the the presentations are technical meant for financial advisers.</span></span><br />
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<span style="font-size: small;"><span style="font-family: Verdana,sans-serif;">The webinars have limited capacity, and the last webinar did fill up quickly. If you sign up but then determine that you cannot attend, could you please consider cancelling your registration to make room for someone else? Thanks, and here are more details taken from the <a href="http://watermarkadviser.com/events/" target="_blank">Watermark Adviser Solutions</a> webpage. </span></span><br />
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<span style="font-family: "Times New Roman","serif";"><span style="font-size: small;"><span style="font-family: Verdana,sans-serif;"><b>TITLE: SAFE SAVINGS RATES WITH DR. WADE PFAU</b><br />DESCRIPTION: On June 18th, at 1:00 pm Eastern Time, Dr. Wade Pfau will be presenting on Safe Savings Rates which combines the pre- and post-retirement periods together to help clients understand how sequence risk can be reduced with more holistic thinking about the lifetime planning problem. His initial article on this research set his career on its current direction. It was featured in the Economist, and it won the inaugural Journal of Financial Planning Montgomery-Warschauer Editor’s Award. The research was also cited heavily in the write-up about his selection for the <a href="http://www.thinkadvisor.com/2014/05/30/wade-pfau-the-2014-ia-25-extended-profile" target="_blank">IA25 list in 2014</a>.<br /><br />The webinar is intended for financial advisers, but anyone is welcome to attend. However, it will be advanced material similar to what is usually provided on his blog. The event may last up to 90 minutes. Please join.<br /><br />To register for this event, please go to:<br /><br />Registration URL: <a href="https://attendee.gotowebinar.com/register/8474557698192835842">https://attendee.gotowebinar.com/register/8474557698192835842</a><br /><br />Webinar ID: 111-216-995<br /><br /><br /><br /><b>TITLE: NAVIGATING THE RETIREMENT INCOME DECISION: PART 2 WITH DR. WADE PFAU</b><br />DESCRIPTION: As a follow up to our May 20th event, where Dr. Wade Pfau addressed how individual investors are extremely vulnerable to the sequence of market returns experienced over their investing lifetimes, we will be hosting Part 2 in our Navigating the Retirement Income Decision Series. On June 26th at 1:00 PM Eastern Time, Dr. Pfau will be extending this discussion and how it applies to flexible spending strategies, valuation-based asset allocation, and sustainable withdrawal rates. For many, actual wealth accumulations and sustainable withdrawal rates will vary substantially for different retirees.<br /><br />The webinar is intended for financial advisers, but anyone is welcome to attend. However, it will be advanced material similar to what is usually provided on his blog.<br /><br />After a brief recap of how to help mitigate sequence risk and utilizing a rising equity glide path in retirement, Dr. Pfau will discuss variable spending strategies utilizing different solutions as well as in response to market and portfolio performance.</span></span></span><br />
<span style="font-family: "Times New Roman","serif";"><span style="font-size: small;"><span style="font-family: Verdana,sans-serif;"><br />The webinar may last up to 90 minutes. Please join.<br /><br />To register for this event, please go to:<br /><br />Registration URL: <a href="https://attendee.gotowebinar.com/register/5189337900677269762">https://attendee.gotowebinar.com/register/5189337900677269762</a><br /><br />Webinar ID: 111-216-995<br /><br />If you have any questions these webinars, please contact Marc Jimenez at Marc.Jimenez@watermarkadviser.com or 855-505-7688.</span></span> </span>Anonymoushttp://www.blogger.com/profile/04168922717655562721noreply@blogger.com0