Wednesday, August 14, 2013

Renaming The Outcomes Of A Monte Carlo Retirement Projection

(Nerd's Eye View, August 14, 2013)
When explaining outcomes of a Monte Carlo retirement projection for a safe withdrawal rate strategy, Mr. Kitces suggests replacing the phrase "probability of failure" with "probability of a mid-course correction" and replacing "probability of success" with "probability of accumulating excess assets."  He implies that this "framing" will help facilitate good decisions.
Does renaming the outcomes of such a projection, as advocated by Mr. Kitces, improve the safe withdrawal rate strategy or is he just putting lipstick on a pig?  In his article, Mr. Kitces implies that the safe withdrawal rate approaches he anticipates aren't really the "set-it and forget-it" approaches anticipated by Bill Bengen, the inventor of the 4% Rule.  He implies that a safe withdrawal rate strategy needs to be revisited periodically to make sure that the client's spending plan remains on track (assets don't shrink too rapidly nor grow too large).  If this is true, however, there seems to be little gained by doing all those calculations that comprise a Monte Carlo projection over doing a simple deterministic projection (except perhaps the impression of more precision).  In both instances incorrect projections of future experience need to be adjusted for actual experience.
Even though it employs a deterministic projection, I continue to believe that the actuarial approach outline in this website is superior to the "set-it and forget-it" safe withdrawal rate strategies.  Once Mr. Kitces describes how the approach he anticipates actually determines how and when mid-course adjustments are made, I might be more open to endorsing it.

Sunday, August 11, 2013

Retirement Planning in an uncertain world

Steve Vernon (CBS Moneywatch, August 7, 2013)
Another excellent post from my friend and fellow Fellow of the Society of Actuaries. Steve succinctly outlines the risks involved in planning for retirement in today's world and suggests the following two-step strategy:

  1. "Step 1: Plan to support the life you want, using your best estimate of the future regarding the economy, capital markets, your life expectancy and so on.
  2. Step 2: Be prepared in the event that your forecasts are wrong."
It would not be unreasonable to address the risks Steve outlines by employing some combination of (i) guaranteed lifetime income (immediate or deferred annuities, annuities from defined benefit pension plans and Social Security, including deferring commencement of Social Security to effectively buy increased lifetime income protection as discussed in my previous posts) and (ii) periodic withdrawals from self-managed assets.

The actuarial approach outlined in my website enables you to coordinate the spend-down of your self-managed assets with your guaranteed lifetime income and allows you to make the periodic adjustments Steve refers to "in the event that your forecasts are wrong."

Thursday, August 1, 2013

The Power of Diversification and Safe Withdrawal Rates

Geoff Considine (, July 30,2013)
Mr. Considine argues that the 4% Rule is still a valid decumulation strategy provided the retiree's assets are invested in a more diversified portfolio than originally anticipated by Bill Bengen, the rule's inventor.

The 4% Rule keeps resurfacing like a vampire in a bad horror movie. As I have said many times in this blog, the 4% Rule (and most other Safe Withdrawal Rate approaches) have just too many weaknesses to be considered an optimal decumulation strategy. I will briefly summarize the 4% Rule and what I believe to be its major weaknesses below.

The 4% Rule. In the first year of retirement, withdraw 4% of your accumulated savings. In each year thereafter, withdraw no more and no less than the first year amount increased by measured inflation since the first year. Make no adjustments for actual investment performance and hope that the assumptions underlying the Monte Carlo analysis performed to determine the "safeness" of the rule pan out and that you die prior to exhaustion of accumulated savings (without leaving too much behind). 

Weaknesses of the 4% Rule

  • It doesn't accommodate a payout period other than 30 years without adjustment.
  • It doesn't accommodate a different investment approach without adjustment.
  • It doesn't accommodate a desire to leave a specific bequest at death
  • It doesn't accommodate a flexible spending schedule (for example if needed for unanticipated medical expenses or to use more assets early as a means to delay Social Security benefits as discussed in the previous post)
  • It doesn't coordinate with other fixed income payments such as immediate or deferred life annuities or payments from defined benefit plans
  • It doesn't adjust for actual emerging experience.
Of course if I didn't believe that the actuarial decumulation strategy set forth in this website wasn't superior to the 4% Rule, I probably wouldn't be here blogging away.