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