Choosing a Retirement Income Strategy: Outcome Measures and Best Practices

Pfau, Wade Donald (2012): Choosing a Retirement Income Strategy: Outcome Measures and Best Practices.

Abstract

The race is on to build frameworks to evaluate retirement income strategies for clients facing various post-retirement circumstances. Retirement income planning is a complicated process in which clients must balance competing tradeoffs (maximize spending, protect from income shortfalls, leave a bequest) over an uncertain lifespan. After providing an overview of the basic building blocks of retirement income strategies, this article seeks to explain best practices, highlight potential missteps and problems which may arise, clarify areas where controversies and disagreements remain, and suggest further enhancements and modifications to make retirement income frameworks as useful as possible. The best practices described here include a description of the approaches and products to be included in a complete framework, the use of simulations or scenario testing as a way to understand how strategies respond in a variety of market circumstances, the need to connect asset market return assumptions to current market conditions rather than historical averages, the need to apply consistent fees across strategies, the need to distinguish how outcomes will differ when using either survival probabilities or fixed horizons, and other matters. The article concludes with a discussion of evaluation criteria, which can be subdivided into three general groupings. These include measures focusing on downside spending in bad luck cases, measures focusing on overall or upside spending or translating spending into the value it provides, and measures taking into account remaining assets at the end of the retirement period.

• Item Type: MPRA Paper
• Language: English
• Keywords: retirement planning, retirement income modeling
• Subjects: D - Microeconomics > D1 - Household Behavior and Family Economics > D14 - Household Saving; Personal Finance

References

Ameriks, John, Robert Veres, and Mark J. Warshawsky. 2001. “Making Retirement Income Last a Lifetime." Journal of Financial Planning 14, 12 (December) 60-76.

Basu, Somnath. 2005. “Age Banding: A Model for Planning Retirement Needs.” Journal of Financial Counseling and Planning 16, 1: 29-36.

Bengen, William P. 2006. Conserving Client Portfolios During Retirement. Denver: FPA Press.

Bodie, Zvi, and Michael J. Clowes. 2003. Worry-Free Investing: A Safe Approach to Achieving Your Lifetime Financial Goals. Upper Saddle River, New Jersey: Financial Times Prentice Hall.

Curtis, Robert. 2006. “Monte Carlo Mania.” In Retirement Income Redesigned: Master Plans for Distribution, Harold Evensky and Deena B. Katz (eds). New York: Bloomberg Press.

Evensky, Harold. 2006. “Withdrawal Strategies - A Cash Flow Solution.” In Retirement Income Redesigned: Master Plans for Distribution, Harold Evensky and Deena B. Katz (eds). New York: Bloomberg Press.

Guyton, Jonathan T. 2004. "Decision Rules and Portfolio Management for Retirees: Is the 'Safe' Initial Withdrawal Rate Too Safe?" Journal of Financial Planning 17, 10 (October): 54-62.

Huang, Dylan W., Matthew M. Grove, and Todd E. Taylor. 2012. “The Efficient Income Frontier: A Product Allocation Framework for Retirement.” Retirement Management Journal 2, 1 (Spring): 9-22.

Huebscher, Robert. 2011. “The Simplest, Safest Withdrawal Rate.” Advisor Perspectives (August). http://advisorperspectives.com/newsletters11/The_Simplest_Safest_Withdrawal_Strategy.php

Huxley, Stephen J., and J. Brent Burns. 2005. Asset Dedication: How to Grow Wealthy with the Next Generation of Asset Allocation. New York: McGraw-Hill.

Malhotra, Manish. 2012. “Retirement Income Compendium.” Income Discovery (February 6). http://www.incomediscovery.com/research.html

Markowitz, Harry M. 1991. “Individual versus Institutional Investing.” Financial Services Review 1, 1: 1-8.

Milevsky, Moshe A., and Alexandra C. Macqueen. 2010. Pensionize Your Nest Egg: How to Use Product Allocation to Create a Guaranteed Income For Life. Mississauga, Ontario: John Wiley & Sons.

Milevsky, Moshe A. 2009. Are You a Stock or a Bond? Create Your Own Pension Plan for a Secure Financial Future. Upper Saddle River, New Jersey: Pearson Education.

Pfau, Wade D. 2011a. “Safe Savings Rates: A New Approach to Retirement Planning over the Life Cycle.” Journal of Financial Planning 24, 5 (May): 42-50.

Pfau, Wade D. 2011b. “Retirement Withdrawal Rates and Portfolio Success Rates: What Can the Historical Record Teach Us?” Retirement Management Journal 1, 2 (Fall): 49-55.

Reichenstein, William, and William Meyer. 2011. Social Security Strategies.

Shankar, S. Gowri. 2009. “A New Strategy to Guarantee Retirement Income Using TIPS and Longevity Insurance.” Financial Services Review 18, 1(Spring): 53-68.

Tomlinson, Joseph A. 2012. “A Utility-Based Approach to Evaluating Investment Strategies.” Journal of Financial Planning 25, 2 (February): 53-60.

Zwecher, Michael J. 2012. “Mike Zwecher: They Each Get Only One Whack at the Cat.” Retirement Researcher Blog (April 12). http://wpfau.blogspot.com/2012/04/mike-zwecher-they-each-get-only-one.html