This 2015 article by David Blanchett, head of retirement research for Morningstar, discusses why you see different conclusions about the "optimal" allocation in retirement. If one study concludes you should decrease equities as you age, and the next study says you should increase them, what are the underlying assumptions that lead to a different answer? He covers all of this.
02Making Sense Out of Variable Spending Strategies for Retirees
This 2015 paper by Wade Pfau compares ten different retirement spending or withdrawal approaches, such as spending a fixed percentage of the remaining balance each year, spending a constant amount, or spending a larger portion as you age such as what you must do with the required minimum distribution rules.
03Reducing Retirement Risk with a Rising Equity Glidepath
This 2013 paper by Wade Pfau and Michael Kitces offers a brand new approach that may go against conventional wisdom. The approach holds up under testing though.
They suggest that a retiree may benefit from gradually increasing their equity allocation in retirement, but they would do so by spending down their fixed income first and foregoing regular rebalancing.
Over various market cycles, this approach had a higher probability of success than the typical approach of decreasing equities throughout retirement. In an updated blog in 2015 Wade, revisits this assumption with To Rise or Not to Rise: Stock Allocation During Retirement.
This Morningstar research paper does a fantastic job of showcasing the difference between the traditional approach to investing, and what is needed to generate sustainable retirement income. As it says,
“A traditional efficient frontier consisting of stocks and bonds only considers the risk-return trade-off in portfolio returns, not the portfolio’s ability to generate sustainable income levels.”
“The key consideration is the recognition that retirement investors care more about income than portfolio returns. But MVO ( mean-variance efficient frontier) only considers a portfolio's risk-return trade-off in terms of returns; it does not consider the risk-return trade-off of the retiree’s main concern – a portfolio’s ability to generate sustainable retirement income.”
05Efficient Retirement Financial Strategies
This 2007 paper by William F. Sharpe, Jason S. Scott, and John G. Watson describes something referred to as the "lockbox approach". They describe the problem they are trying to solve as follows,
"Problem: “For each year in the future, and for all states of the world in each year, our investor must optimally choose how much to consume and an investment policy to support that consumption. If markets are complete, our retiree can purchase contingent claims on the future states, and cash in these securities to pay for consumption.”
They go on to use a lot of mathematical formulas to show why rules of thumb like the 4% rule don't work to solve this problem. When viewing this rule of thumb they say,
"“An efficient retirement strategy must be totally invested in the risk-free asset to provide constant spending in every future state. However, the generic 4% rules couples a risky, constant-mix investment strategy with a riskless, constant spending rule. There is a fundamental mismatch between its strategies, and as a result, it is inefficient.”
This is a short presentation given by Ernst & Young and one of the Retirement Income Industry Association's conferences. It provides several graphs that illustrate why following something like the systematic withdrawal approach (referred to as an SWP) might not work out as well as you think.
They conclude that solutions and strategies in retirement should not be evaluated using traditional metrics (e.g. total return, fees, volatility of returns, etc.) but should instead be based on outcomes such as not running out of money, limiting shortfall risk (the risk of having to take a pay cut in retirement) and maximizing the transfer value of your final estate.
For additional resources check out this site by John Greaney. He has an impressive collection of information on his RetireEarly website. He has also put together a 68-page report on generating retirement income from an investment portfolio and the calculation of a "safe withdrawal rate". He charges $5.00 for the report. I have bought it and read it. It reads like a thesis, so be prepared to head into academia when you sit down to read it. If you like the academic approach you'll enjoy it.
The Retirement Income Industry Association (RIIA) is primarily focused on generating research for the financial services community, so the majority of their research is only available to members.
Even if you don't have access to their research you should check out their methodology page, which I've linked to above, as it provides a great one page summary of the complexity of trying to plan a lifetime of income. If you're in the industry, you may also consider becoming a member. I did.
Retirement Income Research
The Academic Approach To Generating Retirement Income
Below you’ll find resources that dig deep into the numbers to determine how, when and why certain strategies for generating retirement income work, and how effective they are when compared to other strategies.
This collection of retirement income research takes investment portfolios and annuity products, looks at them inside and out, upside and down, and spits out a generous supply of charts, graphs, and tables which tell you exactly how each strategy measures up to the task of generating a life-long inflation adjusted retirement income.