Monday, April 2, 2012

April 2012 Journal of Financial Planning

The April 2012 issue of the Journal of Financial Planning is now out.  This month's contributions section has a strong focus on retirement planning.

The first article, "Withdrawal Rates, Savings Rates, and Valuation-Based Asset Allocation" is by yours truly. This article explores how at least historically, if one change's their asset allocation in response to market valuation levels, this would have supported higher withdrawal rates in retirement and lower savings rates to meet retirement goals. At the request of a journal referee, I also included a section showing the impacts of behavioral mistakes (increasing stock allocations after the stock market already rose, and panicking and lowering stock allocations after the market already dropped) would almost invariably have lowered the sustainable withdrawal rate.  For the example I look at in the article, the SAFEMAX for a fixed 50/50 asset allocation was 3.93%. This increased to 4.58% for a valuations-based strategy. It fell to 3.32% for a mistaken strategy of moving in the wrong direction in response to valuations. Even if you don't buy the valuations-based aspect, at least I hope the article can help emphasize that it is important to stay the course and not give in to the powerful temptations of moving in the wrong direction after the fact.

As Carl Richards insightfully drew:

The second contribution article is "Tax-Efficient Retirement Withdrawal Planning Using a Comprehensive Tax Model" by Alan R. Sumutka, CPA; Andrew M. Sumutka, Ph.D.; and Lewis W. Coopersmith, Ph.D.  I haven't read this one yet, but I will hold on to it for later reading. Taxes is one of my weak areas. This article looks pretty ambitious, as it seeks to consider the tax efficiency of 15 different withdrawal rate strategies.

The third contribution article is "How the Social Security Claiming Decision Affects Portfolio Longevity" by William Meyer and William Reichenstein, Ph.D., CFA. This article shows how delaying Social Security receipt can improve the the sustainability of the 4% rule. You have to withdraw more until Social Security starts, but then can withdraw less after starting Social Security. The strategy isn't fool-proof because a bad sequence of returns early in retirement could cause your portfolio to drop a lot such that you may have been better off starting Social Security earlier, but generally this article provides further supporting evidence for the idea of delaying Social Security, as it provides the most cost-effective inflation-adjusted annuity on the market.

Also worth mentioning in the journal is the Michael Kitces 10 Questions interview. He is one of the leading thinkers in the financial planning world, and he runs an amazing blog

Finally, not from the journal, but the presentation I gave about safe savings rates last week at California Lutheran University has now been posted on YouTube. It was a great pleasure for me to talk with Steve Vernon that day, who at that time was finalizing his article on the NBER study about biased financial planning advice.  You can see him asking a question 51 minutes into the video.


  1. I enjoyed listening to your you tube presentation. One concern with how the theory may play out in real life is that retirees who experienced very bad markets during the latter half of the accumulation phase may become so risk adverser that they refuse to maintain a 60/40 portfolio in the retirement phase such that their safe savings rate will not be counterbalanced by an actual higher safe withdrawal rate. This would be even worse if their risk aversion causes them to shift to bonds when yields are at historic lows and therefore they are relatively overvalued.

    This combined with a predicted withdrawal rate for 2010 retirees of 1.8% for a 60/40 portfolio may make the future challenging for new retirees especially if they retired young and are risk averse with an even higher bond allocation than 40/60

    1. Rick, thanks for sharing. You make a good point with regard to my safe savings rates article. That is one of the first retirement planning articles I wrote before learning more about the idea of floor/upside. It does need some work.

      Best wishes, Wade

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