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Beyond The Uncertainty:. Strategies to Secure your Retirement Income for Life. Planning the Optimal Distribution Strategy for Retirement. Can I continue living in my accustomed comfort and enjoyment? Will I be able to leave an estate to my heirs? - PowerPoint PPT Presentation
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Beyond The Uncertainty:Strategies to Secure your Retirement
Income for Life
Planning the Optimal Distribution Strategy for Retirement
Can I continue living in my accustomed comfort and enjoyment?
Will I be able to leave an estate to my heirs? If I’m fortunate to live a very long and
healthy life, will I have to worry about running out of money?
What this session is, and is not . . .This is not a session on determining retirement income needs
We will identify an approach to effectively determine a Sustainable Withdrawal Rate for your assets
And we will discuss strategies for maximizing the probability that your portfolio will last as long as you need it
Income Projection Models
Straight Line Model
Monte Carlo Model
Market Cycle Model
True Market Model
Straight Line ModelThe ‘internet calculator’ model
Inputs include: average rate of return, average inflation, initial withdrawal, etc.
Ignoring the pattern of the actual market returns results in failure of these projections to achieve their goal 85 – 90% of the time
Handles inflation well, but little else
Factors Affecting Longevity of Retirement Portfolio Inflation Market Factors
Random Fluctuation Market Cycles – cyclical bull/bear markets Megatrends – secular bull/bear markets
Timing of Retirement Reverse Dollar-Cost Averaging
Reverse Dollar-Cost Averaging
Money taken out during market declines is a permanent loss The average retiree will likely endure 3 or 4 cyclical bear
markets during retirement Even a sideways market operates like a bear market for a
retiree
Share Price Invested
$
Total
Cost
# Shares
Bought/Sold
Share
Balance
Total
Market Value
$10 $500 $500 50.0 50.0 500
7 -60 440 (8.6) 41.8 290
8 -60 380 (7.5) 33.9 271
9 -60 320 (6.7) 27.3 245
10 -60 260 (6.0) 21.3 213
Income Projection Models
Straight Line Model
Monte Carlo Model
Market Cycle Model
True Market Model
Typically runs a thousand or more iterations simulating random market fluctuation around an assumed rate of return
Determines probability of certain outcomes
Handles random fluctuations and inflation fairly well, but not market cycles
Probability of Depletion Assumptions:
Strategic Asset Allocation Mix: 40% Equity + 60% Fixed Income
5% Initial Withdrawal Rate
Years After Retirement Monte Carlo Simulation Actual Market, Since 1900
10 0% 0%
15 1% 3%
20 14% 36%
25 37% 68%
30 55% 86%
Market Cycle Model Divides straight-line model
into average historic bull and bear cycles
Applies random number generation to vary the strength and duration of each cycle
Runs projections for retirement at the beginning of either a bull or a bear cycle
Income Projection Models
Straight Line Model
Monte Carlo Model
Market Cycle Model
True Market Model
Handles consequences of market cycles and reverse dollar-cost averaging significantly better
Moves away from ‘guesses’ about future returns and inflation
Still does not allow for megatrends, skewness of market volatility, or significant variations in inflation
Income Projection Models Provides us with a
range of outcomes using actual historic market data since 1900, based on retirement starting at the beginning of each year
Straight Line Model
Monte Carlo Model
Market Cycle Model
True Market Model
Sustainable Withdrawal Rate Assuming:
The optimal asset mix of equities and bonds Actual market and inflation history from 1900 – 2003 Life expectancy to age 95
Retirement Age SWR60 3.1%65 3.6%70 4.1%75 4.7%
Strategy for Maximizing Portfolio Life Optimize the allocation mix for longevity Optimize the rebalancing strategy Optimize the Asset Allocation method
Strategic Age Based Tactical Trend Following
Optimal use of Guaranteed Components Calculation Methodologies
Optimize the Allocation Mix
Goal: Highest probability of desired portfolio life Highest minimum life Highest average life
Note: Unless there are significantly more assets than necessary to comfortably provide for retirement, optimizing the portfolio for longevity has nothing to do with the individual’s risk tolerance
Fixed Income vs. Equity
Determinants of OptimalAllocation Mix
Initial Withdrawal Rate (indexed for inflation) Asset mix: From 0% to 100% equity (DJIA) vs. fixed
income Margin of outperformance or underperformance of
equities relative to DJIA
Calculated probabilities of depletion based upon actual market history assuming retirement at the beginning of every year from 1900 through 1999
Probability of Portfolio Depletion Starting years 1900 to 1999 Initial portfolio $3,000,000 Initial withdrawal rate of $90,000 per year, (3%),
indexed to inflation
Worst 20 Years 30 Years 40 YearsMedian Estate ValueAt 40 Years
All Equities 15 yrs. 7% 39% 47% $317,000
40% Equities60% Bonds
37 yrs. 0% 0% 5% $7,500,000
Optimize the Rebalancing Strategy
When using only fixed income and domestic equities (DJIA), rebalancing every four years at the end of the presidential election year yielded the best historical results
Politics and the MarketAverage Performance of DJIA During Years of
Presidential Term, 1901 - 2000
Optimize the Asset Allocation Method
Strategic
Age Based
Tactical
Trend Following
Guaranteeing Your Income for Life When do annuities make sense and in what
proportion to your portfolio? Investing Only Buy Term Annuity and Invest the Difference [Grangaard] Buy Life Annuity and Invest the Difference
Comparing Guarantee Strategies Assumptions:
Retire at Age 65 with $1,000,000 to invest Initial Withdrawal of $50,000 (5%) 40% Equity + 60% Fixed Income Years from 1900 to 1999
Worst Age 85 Age 90 Age 95
Invest Only 19 yrs. 2% 13% 32%
Term Annuity1 & Invest 23 yrs. 0% 8% 32%
Life Annuity2 & Invest Perpetual 0% 0% 0%
1 Term annuity was 10 yr. annuity purchased for $411,500 providing income of $50,000 annually, indexed2 Life annuity income provided by annuities purchased annually for first 3 years. Average estate value at age 95 was
$1,318,000.
Buy Life and Invest the Difference
Build a life annuity ladder over time and invest the balance
Determining the Annuity Component
Min. (Required Withdrawal Rate – Sustainable Withdrawal Rate)
Annuity % = ------------------------------------------------------------------------ x 100
(Annuity Payout Rate – Sustainable Withdrawal Rate)
MA < 0 : Abundant savings; life annuity shouldn’t be necessary
MA of 0 – 100 : Sufficient savings; use life annuity to provide security
MA > 100 : Insufficient savings; best assurance of continued income is
100% life annuity
Calculation Methodologies No calculation methodology should escape
continual examination
Visit: http://www.jotar.com for more information on the concepts presented here
See handout illustration: A Case Study