Tuesday, January 17, 2012

Guarantees vs. Control

Glenn Ruffenach wrote an article for the new issue of SmartMoney Magazine called, "Is the 4 Percent Rule Viable?" 

I think the answer is that it depends on your perspective. And I do think the article provides some pretty sensible advice. It didn't get too much into the nitty gritty of why my 1.8% number is not really incompatible with the Williams and Finke 7% number. For more details on that, it is basically what I was talking about here on Monday, and Doug Nordman also has a great explanation, "Is the 4% Withdrawal Rate Really Safe?" 

One other brief matter.  Perhaps taking inspiration from Carl Richards' The Behavior Gap (though he is much better at it), on the train ride to work today, I drew this:



It seems like retirement income strategies boil down to where you want to fall on the spectrum between having control of your assets and have guaranteed (inflation-adjusted) protections for life. More research should focus on the potential spending power and the cost-effectiveness of the different strategies on the frontier for these competing tradeoffs.


5 comments:

  1. As usual, Wade, this is very interesting and helpful.

    http://rpseawright.wordpress.com/2012/01/18/guarantees-v-control/

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  2. Thank you Bob!

    And you are making a very important point at your blog as well, which I definitely encourage everyone to read.

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  3. Wade, as someone aged 63 planning to retire in 2-4 years, I find this question of much more than academic interest. First I could see retiring as late as 67, since my job is relatively secure and those extra years give my retirement assets more time to grow untouched. Second, I am seriously considering an idea Mike Piper proposed that I haven’t seen suggested elsewhere; that is, delay SS or annuities as long as possible, and temporarily withdraw at a higher than 4% rate from the safest asset classes of my portfolio, so that eventually I can rely more on SS than if I started it at my FRA of 66.

    What bothers me most about some conventional discussions of retirement is that they always propose a static target “number” after which you can “comfortably” retire, without considering how you may need to make constant dynamic adjustments during the retirement period based on such unforeseen variables as market fluctuation, health, life expectancy, inflation, part-time employment, changes in tax law, and so forth. That said, I can easily see the benefits of relying substantially on SS and/or an annuity as the basis for the above-mentioned “comfortable” retirement.

    I’d appreciate your thoughts on any or all of the above.

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    1. Hi Larry,

      I think you are the same Larry I acknowledged in my safe savings rates article, and also who helped motivate my "Getting on Track" article for those in mid-career who are interested in safe savings rates. http://www.fpanet.org/journal/CurrentIssue/TableofContents/GettingonTrackforaSustainableRetirement/

      Yes, I think there is a lot to be said getting guaranteed income sources for retirement. And though I haven't tried running any numbers myself yet, it does sound like a pretty good idea to me to delay starting Social Security to age 70 as long you have reason to plan for at least an average lifespan. Each year you wait gets you a handsome return due to the increases in Social Security benefits for starting later. So it would be fine to withdraw more from your safe assets during the waiting period, because with the higher Social Security benefits you will need less later on anyway. Well, you say withdraw from your safe assets, but that doesn't mean you necessarily want to let your risky asset allocation creep upward. Some people seem afraid that Social Security will soon disappear, but I don't see that happening.

      Don't take what I've written here as gospel. This is something that I still want to run some of my own simulations about some day to make sure it's right.

      I agree with you about the uselessness of focusing on "The Number"

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  4. Yes, Wade. Same Larry. From what you've been writing lately, it seems there are some more insightful ways to structure one's retirement than to simply say, you need $1 million in the bank and then you take 4% annually. As for my potential asset allocation, it seems to me that the wise approach might be to rebalance each year to keep perhaps five years of expenses in very safe assets at all times, and the remainder in a balanced portfolio of stocks and bonds.

    You seem to have your finger on a lot of interesting research, and I hope at some point you write an article or book for the retiring person on top of your articles for the academic world.

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