You want the good news first? The good news is that Dr. Blanchett’s latest research shows that retirees:
- with a larger percentage of their wealth invested in a specific type of guaranteed income,
- who are willing to commit to Dr. Blanchett’s complicated dynamic adjustments,
- who can achieve higher investment returns, or
- who are willing to live with lower probabilities of success
- it is a mistake to view portfolio withdrawals in isolation from other sources of income (as is the common practice), and
- risks retirees face in retirement can be mitigated by investing in guaranteed lifetime income sources and using dynamic rather than static spending strategies.
A Few More Thoughts
As we have discussed in previous posts, in making SWPs work, researchers will generally pair the SWP with lifetime income streams that are paid in constant real dollars. This is exactly the type of lifetime payment stream that Dr. Blanchett is referring to when he uses the term “guaranteed income.” It is important to note that Dr. Blanchett would probably not reach the same conclusion if he defined “guaranteed income” as the far more common fixed dollar (constant nominal dollar) stream of payments, because, under this scenario, greater portfolio withdrawals would be needed in later years to provide total constant real dollar spending. We caution financial advisors and retirees who may be misled by conclusions reached by Dr. Blanchett’s because of how he defines “guaranteed income.”
Dr. Blanchett goes to significant lengths in his article to point out that the methodology he uses in his analysis weights the probability of the retiree household surviving to each age rather than using “some arbitrary fixed period.” We note, however, that Dr. Blanchett makes a number of significant assumptions in his calculations to simplify his calculations, so we find the implied precision of this one particular assumption to be grossly exaggerated. And, we tend not to get as excited as Dr. Blanchett (and others) about assuming fixed lifetime planning periods. We note that, in real life, whether one lives or dies is a binary process, and little pieces of us do not die each year.
While on the subject of implied precision, we will once again tackle the common misperception that, just because a researcher runs 10,000 scenarios using Monte Carlo modeling, that:
- employs lots of assumptions about future experience,
- employs lots of simplifying assumptions about hypothetical retiree sources of income, and
- assumes retiree future spending will exactly follow certain sophisticated algorithms each year in the future,
Finally, the Society of Actuaries 2012 IAM table(s) are the Individual Annuity Mortality tables, not the Immediate Annuity Mortality table, as stated in the article.
As discussed many times in this website, we think the safe withdrawal rate strategies are deficient in a number of areas, and attempts like Dr. Blanchett’s and others to modify them to make them work better are probably not worth the effort. We know that you find this hard to believe, but we actually think a better answer lies with the Actuarial Approach we recommend. And the really good news here is that the Excel workbooks that we provide to help you implement the Actuarial Approach are available for free and are just a click away.