As someone who has frequently ranted on this website against the 4% Rule and encouraged the use of a dynamic retirement income withdrawal strategy, I recommend this paper to readers of this blog. In many ways, the expressed goals of the JP Morgan withdrawal strategy are similar to the goals of the withdrawal strategy suggested in this website. The JP Morgan paper also combines its withdrawal strategy with an investment allocation strategy, which I do not address in this website as I have no investment expertise.
In addition to attempting to carefully balance lifestyle risk and longevity risk, JP Morgan also attempts to "maximize how much utility value investors receive from their withdrawals." This utility value maximization is also not something that I address in my recommended withdrawal strategy.
Some concerns I have
with the JP Morgan Strategy:
The withdrawal schedule
is significantly more aggressive than withdrawal rates recommended in this
website. For example, JP Morgan specifies an initial 5.9%
withdrawal rate for a 65 year old with $1,000,000 in accumulated
savings and $50,000 in "lifetime income". Based on the assumptions recommended in thiswebsite and zero bequest, I get a withdrawal rate of 3.45% using the
Excluding Social Security 2.0 spreadsheet if I assume $30,000 of the $50,000 of
lifetime income is in the form of a fixed immediate annuity (with the remaining
$20,000 payable from Social Security). The main reasons the JP Morgan withdrawal
rate is so much higher is that their model assumes higher
future investment returns, lower future inflation, a shorter payout period
and does not anticipate using accumulated assets to provide for
future inflation adjustments to fixed payment "lifetime
income." If comparable assumptions are used for both models, I would
anticipate results to be very similar for the initial year's withdrawal.
Additionally, the JP Morgan strategy does not appear to have relatively constant inflation adjusted retirement income as a goal. Therefore, all things being equal, their withdrawal strategy would be expected to be more volatile from year to year than the approach recommended in this website when measured in inflation adjusted dollars.
Additionally, the JP Morgan strategy does not appear to have relatively constant inflation adjusted retirement income as a goal. Therefore, all things being equal, their withdrawal strategy would be expected to be more volatile from year to year than the approach recommended in this website when measured in inflation adjusted dollars.
Because the JP Morgan
paper was critical of the performance of the 4% Rule in volatile markets,
"especially when a portfolio loses significant value during the early
years of retirement" I decided to calculate spending budgets and remaining
assets under the JP Morgan strategy and the Steiner Actuarial Approach
(using recommended assumptions and smoothing methodology) for
a hypothetical retiree where asset returns are somewhat
unfavorable. The two graphs below compare retirement spending
budgets (withdrawals from accumulated savings + Social Security + fixed
pension) and remaining assets under the JP Morgan Dynamic Strategy with
the Steiner Actuarial Approach for someone retiring at age 65 with
$1,000,000 in assets, $20,000 in annual Social Security and $30,000 in fixed
pension/life annuity income (for a total of $50K) of "lifetime
income".
I assumed about a 0% average annual rate of return for this
hypothetical retiree's first five years of retirement with the following
randomly chosen rates of investment return:
year 1: -15%, year 2: 2%, year 3:
5%, year 4: -5% and year 5: 15%. I also
assumed 3% inflation each year. I used
the withdrawal rate table included in the JP Morgan article to determine
withdrawal rates and I interpolated between relevant wealth and age factors. I ignored the fact that inflation increases
in the retirees Social Security benefit would increase the retirees
"lifetime income" and thus perhaps slightly increase the retiree's
withdrawal rate under the JP Morgan approach.
I also assumed that the JP Morgan withdrawal rate tables (and the
Steiner recommended assumptions) would remain unchanged for the entire 5 year
period. For each approach, I assumed
that the annual budgeted amount determined under the relevant approach would be
spent during the year.
Comparison of Budget Amounts In Inflation-Adjusted Dollars
Comparison of Remaining Asset Amounts
The graphs show that based on this assumed investment
experience, the JP Morgan strategy
produces a spending budget that is somewhat more volatile (when measured in
inflation adjusted dollars) than the Steiner Actuarial Approach. Because it is more aggressive than the
approach in this website (based on recommended assumptions), it produces higher
spending budgets each year and therefore lower remaining assets at the end of
the five year period. Is the JP Morgan strategy
better than the Steiner Actuarial Approach?
I don't believe its use of Monte Carlo simulations or utility value
maximization necessarily make the JPMorgan strategy superior. If comparable assumptions are used, results
under the two methods can be comparable, and the smoothing algorithm in the
Steiner Actuarial Approach results in more real dollar stability in the
retiree's spending budget from year to year.
The Steiner approach is also readily available on this website.