These articles and papers are exceptionally interesting in how they approach the subject of devising or evaluating strategies for generating and providing for income during retirement. The abstract snippets below have been extracted from the papers cited along with links.
ABSTRACT
“The purpose of this study is to first establish a framework to evaluate different withdrawal strategies and secondly to use that framework, in conjunction with Monte Carlo simulations1, to determine the optimal withdrawal strategies for various case studies. To establish the framework, we introduce a new metric, the “Withdrawal Efficiency Rate” (WER), which measures the relative efficiency of various withdrawal strategies. The Withdrawal Efficiency Rate compares the withdrawals received by the retiree by following a specific strategy to what could have been obtained had the retiree had “perfect information” at the beginning of retirement. This measure allows us to quantify the relative appeal of each approach, and thus creates a framework to determine how best to generate income from a portfolio. Insofar as maximizing withdrawals, subject to a retiree’s budget constraints, is a critical aspect of building a successful retirement plan, this framework should help both retirees and their advisors determine a more secure foundation for retirement spending. In particular, we will show that spending regimes that dynamically adjust for changes in both market and mortality uncertainties outperform the more traditional approaches.”
Optimal Withdrawal Strategy Retirement Income Portfolios
ABSTRACT
“When it comes to generating retirement income, investors arguably spend the most time and effort on selecting ”good” investment funds/managers—the so called alpha decision—as well as the asset allocation, or beta, decision. However, alpha and beta are just two elements of a myriad of important financial planning decisions for the average investor, many of which can have a far more significant impact on retirement income. We present a concept that we call “Gamma” designed to quantify the additional value that can be achieved by an individual investor from making more intelligent financial planning decisions. We measure value through a certainty-equivalent utility-adjusted retirement income metric. Gamma will vary for different types of investors and for different strategies; however in this paper we focus on five fundamental financial planning decisions/techniques: a total wealth framework to determine the optimal asset allocation, a dynamic withdrawal strategy, incorporating guaranteed income products (i.e., annuities), tax-efficient decisions, and liability-relative asset allocation optimization.”
ABSTRACT
“This article presents the initial stages of a new evaluation framework for choosing among
retirement income strategies. The investigation includes eight retirement income
strategies: constant inflation-adjusted withdrawal amounts, a constant withdrawal
percentage of remaining assets, a withdrawal percentage based on remaining life
expectancy, a more aggressive hybrid withdrawal percentage, inflation-adjusted and fixed
single premium immediate annuities, a variable annuity with a guaranteed living
withdrawal benefit rider, and a strategy which annuitizes the flooring level to meet basic
needs and uses the hybrid withdrawal percentage for remaining assets. These eight
strategies will be analyzed with six retirement outcome measures over a 30-year
retirement period: the average amount whereby spending falls below the minimally
acceptable level, the average spending amount, the remaining bequest at the end of the
retirement period, the minimum spending amount for any year in the retirement period, a
measure of whether spending increases or decreases over time defined as spending in the
first year divided by spending in the 30th year, and the value of total spending after
accounting for diminishing returns from increased spending for a client with somewhat
inflexible spending needs. The model is applied to three client scenarios representing a
cross-section of RIIA’s client segmentation matrix. It is built using Monte Carlo
simulations which reflect current market conditions, so that systematic withdrawals and
guaranteed products share compatible underlying assumptions.”
Choosing Retirement Income Strategy
ABSTRACT
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This paper demonstrates how practitioners can better use the often-overlooked probability of failure as a decision tool.
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Withdrawal rates depend on the retiree’s age (distribution time remaining), and therefore withdrawal rates alone do not tell a complete sustainable distribution story.
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Probability of failure does not depend on the retiree’s age and is therefore useful for comparison of withdrawal rates over any time period or asset allocation.
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Comparison of probability-of-failure curves, and their shift between strategies, illustrates how effective one strategy is compared with another.
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The methodology presented provides an ability to evaluate the withdrawal rate and exposure to sequence risk together.
Sequence risk is an important issue is assessing plans and models and is covered well in article cited.
Withdrawal Strategies
These links provide several detailed strategies and guidelines for determining withdrawal rates / amounts over the retirement planning horizon. Some appear also in articles cited above. As with much of financial literature, both pros and cons are associated with any of the proposals contained therein. Which is why it is important to conduct some independent analysis on the matter.
https://finalytiq.co.uk/guyton-klinger-sustainable-withdrawal-rules/
http://cornerstonewealthadvisors.com/wp-content/uploads/2014/09/08-06_WebsiteArticle.pdf
https://www.kitces.com/blog/adjusting-safe-withdrawal-rates-to-the-retirees-time-horizon/
https://www.thebalance.com/withdrawal-rate-lasting-savings-2388529
Comparing Retirement Spending Rules
https://retirementresearcher.com/comparing-retirement-spending-rules-using-historical-data-xyz-rule/