by Larry Frank Sr., John B. Mitchell and Wade Pfau
A tip of my hat to Messrs. Frank Sr., Mitchell and Pfau for publishing this
fine (and very thorough) paper. The authors use a sophisticated Monte Carlo
simulation approach to conclude that many retirees may find it financially
beneficial to delay purchase of a single premium life annuity until a later
age and self-manage their retirement assets until such age.
"The paper provides insight and guidance for the retiree decision making
between whether to annuitize or manage their retirement savings." While the
authors' analysis examined this decision on an "either or" basis, it would
be interesting to see their analysis for partial SPIA annuitization/partial
self-management strategies (which could affect investment allocation
decisions) or strategies that involve purchase of single premium deferred
annuities (sometimes referred to as longevity annuities).
If you have read even a few of my prior blog posts, you will know that I am
not a big fan of "set and forget" Safe Withdrawal Rates determined using
Monte Carlo simulations. As indicated in the authors' paper, the
authors advocate a dynamic approach, described as follows:
"The newer camp is more dynamic with annually recalculated, serially
connected, simulations to arrive at a Prudent Withdrawal Rate (PWR) that
is sustainable given current conditions. Client annual reviews include
annual updates to the simulation data to reflect 1) period life table
changes and changes in personal health, 2) current portfolio value, 3)
latest market data series, and 4) current year feasible spending needs.
The dynamic school provides an ongoing method to address how often and
by what method "revisiting" the PWR and making corrections to it
recognizing that markets affect the safety of withdrawals and that time
allows the PWR to increase."
Thus, while the authors use Monte Carlo simulations, they are using an
approach that is similar to the actuarial approach advocated in this
website. In discussions with Mr. Frank Sr., he even refers to his
approach as an "actuarial" approach. Since it is so similar, he makes
it very difficult for me to find fault with it.
This paper is a practical application of the previous work done by
Messrs. Frank Sr., Mitchell and Blanchett in three papers that describe
in more detail their dynamic approach. Links to these excellent papers
may be found in Mr. Frank Sr.'s website and blog "Better Financial Education.com"