Sunday, September 22, 2013
Retirement Income Source Diversification
http://howmuchcaniaffordtospendinretirement.webs.com/Retirement_Income_Source_Diversification_09222013.pdf
As indicated in previous posts, It is not unreasonable to manage risks in retirement by diversifying sources of retirement income. This could involve maximizing Social Security benefits (by deferring commencement), utilizing some life insurance company annuity products (or defined benefit plan annuity income) and utilizing a rationale spend-down strategy for managed assets. This article compares three diversified options with the 100% Annuity option and the 100% Self-Managed option.
Thursday, September 12, 2013
Gotbaum Tells Council Lump-Sum Cash-Outs Are Like Cigarettes: Legal but Bad for You
Pension Rights Center
http://www.pensionrights.org/sites/default/files/docs/news/130903_bna_pension_benefits_reporter_-_gotbaum_tells_council_lump_cashouts_are_like_cigarettes_legal_but_bad_for_you_-_k2_nstein_quoted_banner_version.pdf
In this article, the head of a federal government agency implies that most people aren't very smart when given a choice between an annuity and a lump sum in a defined benefit plan. He indicates that since 1997, more than two out of three people have taken the lump-sum option instead of an annuity when given a choice.
Therefore he concludes that more government regulation is needed to prevent you from making the "bad" lump sum choice.
This thinking appears to be shared by representatives of the Department of Labor who continue their push to make it more difficult for people to take "bad" lump sums from defined contribution plans.
Never mind that recent research from Felix Reichling and Kent Smetters questions the supposed superiority of the annuity choice. And never mind that recent research from Frank Sr., Mitchell and Pfau (see previous post) suggests that it may make financial sense to rollover the lump sum to an IRA and purchase an annuity at a later date. And never mind that rolling over the lump sum to an IRA, buying a longevity annuity with a portion of the proceeds and self-managing the remainder of the assets may help you better manage risks in retirement by diversifying your sources of retirement income.
Bottom line--Don't worry. When it comes to your retirement, your federal government knows what is best for you.
Tuesday, September 10, 2013
Life Expected Income Breakeven Comparison Between SPIAs and Managed Portfolios
by Larry Frank Sr., John B. Mitchell and Wade Pfau
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2317857
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"
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2317857
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"
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