Monday, February 18, 2013

Wade Pfau's Retirement Research Blog
February 19, 2013
Developing A Retirement Spending Strategy--An Actuarial Approach
by Ken Steiner, Fellow, Society of Actuaries, Retired

Monday, February 11, 2013

Paper Poses New Withdrawal Rate Method
(Plansponsor, February 8, 2013)

Another paper on the same theme from Blanchett, Finke and Pfau (see "The 4 Percent Rule is Not Safe in a Low-Yield World).  While I applaud the work of these gentlemen in showing that using the 4% rule, or any other "safe" withdrawal rate may be dangerous, I find that the authors are simply demonstrating the weaknesses of relying on the Monte Carlo method to determine an initial withdrawal rate that is subsequently increased by inflation.  Yes, the assumptions they use for expected future experience are more sophisticated than those used in previous studies (they assume expected interest rates will rise in the future rather than remain constant).  But, even this more sophisticated model makes no adjustment for possible future experience that deviates from assumed experience (or actual spending).  In the Plan Sponsor article, Blanchett says, I acknowledge that this [model] may not be relevant in five years when bond yields are [assumed to be] higher." I also had to laugh when I read, "the average person running these [Monte Carlo] simulations is getting a falsely successful picture."  No average retiree I know is running Monte Carlo simulations in her spare time.

Sunday, February 3, 2013

How Much Can You Withdraw From Your Savings
(January/February 2013 Money magazine (page 116) -- No Link)

"Best move: Recalculate your withdrawals every year to take into account your current account balances and the fact that your nest egg doesn't have to support you for as long." 

"With a decision this big, you don't want to blindly stick to the 4% rule or any other rigid system..." 
"As a practical matter, though, recalculating your withdrawal rate this way can be quite complicated.  So unless you're working with a financial planner capable of doing the number crunching for you, your best bet is to go to  an online tool like T. Rowe Price's Retirement Income Calculator every year, plug in your most up-to-date information, and adjust your withdrawals up or down as necessary." 

I couldn't agree more with this advice from Money magazine.  And the online tool "like" T. Rowe Price's that you should use is located right here in this website.  See related link below for a discussion of some of the weaknesses of the T. Rowe Price tool.