Friday, December 23, 2011

Can you retire before 2013?

Can you retire before 2013?
Jeff Wuorio (MSN Money, December 23, 2011) 


Comment:  Not a bad article, but one that does demonstrate that when you plan for retirement, you need to pay attention to:

1) the tax treatment of various sources of income (and make sure that you treat them consistently), and
2) whether or not sources of income increase with inflation

In the example in the article, the author determines that the retiree will need $600,000 of taxable accumulated savings (like a 401k plan) to replace pre-retirement standard of living.  However, if we assume a 20% effective tax rate on all income sources, 3% inflation and a 5% return on assets, the net annual income target of $63,600 ($5,300 per month) becomes $79,500 before taxes and $59,100 after subtracting Social Security.  In order to generate annual real income of $59,100 per year for a 25 year period, the spreadsheet above indicates that the retiree would need to have about $830,000 in accumulated savings, not $600,000.

Friday, November 18, 2011

Floor-Leverage Rule Instead of 4% Rule

Floor-Leverage Rule Instead of 4% Rule 
SSRN - November 18, 2011 

Comment: Under this rule, the authors suggest building an income floor with 85% of accumulated assets, investing the remaining 15% of "surplus assets" aggressively in a portfolio with a 3x leverage factor and transferring assets from the surplus asset fund annually if it grows to be larger than 15% of total accumulated assets.

Monday, November 14, 2011

Retirement '4 percent' rule not sure thing

Retirement '4 percent' rule not sure thing 
Gail MarksJarvis (Chicago Tribune, November 14, 2011) 
 
Comment: Her solution to 4% rule problems--Take out 3.5% in initial year and skip inflation increases if market goes south.

Sunday, August 21, 2011

"Research & Reality--A Literature Review on Drawing Down Retirement Financial Savings"

"Research & Reality--A Literature Review on Drawing Down Retirement Financial Savings" 
(Society of Actuaries) The stated objective of this paper is to "review the existing literature on this multifaceted topic so as to draw clear insight on the best approach to drawing down individual retirement savings." 
 
Comments:  Comprehensive (64 pages) review of academic literature focusing on combinations of annuitization and self-managed drawdown strategies.  Pages 48-54 provide considerations for a person "contemplating self-managing some or all of his/her retirement assets" (i.e., the individuals for whom this website has been designed).  Most of the considerations noted by the authors in these pages can be addressed using the simple spreadsheet and the process set forth in the March, 2010 article above.

Tuesday, March 1, 2011

Vanguard looks at ways to spend retirement savings

Vanguard looks at ways to spend retirement savings
Vanguard (March 1, 2011) 

 
Interesting read.  Stochastically testing three spending strategies using proprietary data and assuming a 50% equity/ 50% bond investment mix (rebalanced each year), the Vanguard Investment Strategy group determines that the "percentage-of-portfolio" approach with limits on annual increases or decreases in the previous year's amount is preferable to the other two approaches studied.  Article implies that a 4.75% initial withdrawal rate is reasonable for a 35-year payout period and the 50%/50% investment mix (implying about a 3.5% real annual rate of investment return using the "Excluding Social Security" spreadsheet above).  There appear to be some mixed messages in this article as the authors state that maintaining a flexible spending plan is key, but recommend a plan that is not flexible, and they fail to address how their recommended plan should be adjusted for adverse (or favorable) experience. 

Friday, February 11, 2011

Safe Savings Rates: A New Approach to Retirement Planning over the Lifecycle

Safe Savings Rates: A New Approach to Retirement Planning over the Lifecycle
Wade Donald Pfau (National Graduate Institute for Policy Studies, February 11, 2011) 

 
Take-away for retirees and those close to retirement: If you saved 16.62% of pay each year for 30 years preceding retirement, are targeting a 30-year pay-out period, invested 60% equities/40% fixed income pre-retirement (and intend to keep this investment mix post-retirement with annual rebalancing), received pay increases each year equal to the increase in inflation, then historical data shows that you can withdraw whatever you need each year after retirement to have inflation adjusted income from accumulated savings of 50% of your final year's pay. The 16.62% figure refers to what was needed in the worst-case scenario from the historical data. If some of these assumptions don't apply, you need to make necessary adjustments in your withdrawal rate. Table 1 of Pfau's paper provides hints for adjusting for experience different from base assumptions.