Wednesday, January 30, 2013

An Efficient Frontier for Retirement Income by Dr. Wade Pfau
(Social Science Research Network) 

When I questioned Dr. Pfau about what he and his co-authors meant by the statement, "clients may wish to consider their retirement income strategies more broadly than relying solely on systematic withdrawals from a volatile portfolio" in the paper "The 4% Rule is Not Safe in a Low-Yield World" (see below), he responded by referring me to this new paper to be published in the February issue of The Journal of Financial Planning.
The paper uses Monte Carlo simulations and "current market" assumptions to determine an efficient frontier of investment allocations that best meet the two competing financial objectives for retirement defined by Dr. Pfau:  "satisfying spending goals and preserving financial assets."  He examines allocations involving six different types of investments.  Based on his methodology and assumptions, he concludes that the efficient frontier for a hypothetical 65-year old couple consists of combinations of stock and fixed single premium immediate annuities.
This is another excellent paper from Dr. Pfau that should be useful in helping retirees develop or refine their investment strategy.  However, the approach suggested doesn't appear to provide guidance on how adjustments are made in later years for deviations from the spending plan, actual investment experience, changes in health or changes in initial assumptions.  Perhaps he anticipates that the client and financial planner will meet periodically to re-run the model and make appropriate adjustments.  In any case, I look forward to further research by Dr. Pfau using this model, particularly inclusion of qualified longevity annuity contracts in the investment allocation mix.

Wednesday, January 23, 2013

Steve Vernon

I worked for many years with Steve at Watson Wyatt Worldwide (now Towers Watson).  Steve is a fellow Fellow of the Society of Actuaries and is very passionate about helping people prepare for and prosper in their retirement years.  Steve has written four books on retirement planning.  His most recent book is entitled "Money for Life."  It is an excellent book, and I'm not just saying that because he is my friend or because he refers to my website on pages 145-148 of the book.  You can learn more about Steve's work on his website "," and I recommend that you read his excellent blog articles for CBSMoneywatch.

Saturday, January 19, 2013

The 4% Rule is Not Safe in a Low-Yield World

(Social Science Research Network, January 15, 2013)
The authors put what is hopefully the final nails in the coffin of the 4% Withdrawal Rule, and make a compelling argument for avoiding any "safe" withdrawal rate strategy.  They conclude that, "The success of the 4% rule in the U.S. may be an historical anomaly, and clients may wish to consider their retirement income strategies more broadly than relying solely on systematic withdrawals from a volatile portfolio."
As noted elsewhere on this website, I agree with the authors that the 4% Rule (or some other specific "safe" withdrawal rate) does a poor job of balancing the dual needs of retirees to maintain lifestyle spending and preserve financial assets.  Retirees need a spending plan that is flexible, reflects actual spending and investment experience and reflects individual circumstances (such as existence of other lifetime income through defined benefit plans or immediate or deferred annuity contracts as well as any bequest motives).  Fortunately, the actuarial approach outlined in this website can help you meet these needs.