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A retirement planner that’s a little more flexible |
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flexibleRetirementPlanner.com |
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For Further Reading |
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The links below point to some of the research that inspired and influenced the flexibleRetirementPlanner. The planner doesn’t directly implement any of the decision rules or other algorithms described in the listed papers and web sites, but the research and hard work of these people and others has provided much of the foundation on which the tool was built.
Decision Rules and Maximum Initial Withdrawal Rates - Guyton, 2006 This paper is from the March 2006 issue of the FPA’s Journal of Financial Planning. It’s relatively easy reading and it lays out the basis of so called “decision-rule” based retirement withdrawal strategies along with providing simulation results that are neatly organized. This paper is a critique or analysis of several of the Monte Carlo retirement simulators that are out there (sorry—flexibleRetirementPlanner wasn’t out yet). The main thrust of the work is that there’s a wide degree of variation in the output that’s mostly a result of variation in the assumptions that the tools have made, but that’s also unexplained. The paper points out some shortcomings of the “art” and suggest that some standardization might help. This paper is a bit of a departure from the safe withdrawal rate debate and instead focuses on the risks and variables that determine the probability of retirement ruin. Milevsky includes the usual suspects like spending rates and portfolio composition, but also discusses management of longevity risk. The paper is pretty thick with math, but you can skim over the equations and still get a good read out of it. Another paper on dynamic retirement withdrawals using a decision rule based approach. This paper suggests that mortality risk should also be modeled as part of the Monte Carlo Simulation process. Also, there’s some discussion of applying a floor and a ceiling to the dynamic withdrawal rates. This is an earlier article by Jonathan Guyton on withdrawal decision rules that also appeared in the FPA’s Journal of Financial Planning.
Conserving Client Portfolios During Retirement - Part IV, Bengen, 2001 This paper builds on previously identified retiree spending “phases” and leverages these to explore alternative withdrawal strategies. The paper explores several strategies that attempt to boost retiree living standards while minimizing the effect on the likelihood of ruin.
This is a small piece from a contributor to the Seeking Alpha weblog that critiques the paper by Milevsky above and also has some debate in the comments on how to model portfolio returns in long term Monte Carlo simulations.
The Calculus of Retirement Income: Financial Models for Pension Annuities and Life Insurance - Milevsky, 2006 This book explores the mathematical underpinnings of risk management in the retirement planning process and in doing so comes to some surprising conclusions. Milevsky covers topics ranging from the role of annuities in managing longevity risk to the role of derivatives in managing volatility . The text isn’t light reading but there are important ideas in it for professionals or serious students of the art.
All material on this site is Copyright 2008 Jim Richmond. All Rights Reserved. |
