New Way to Analyze Retirement Income Planning

[pkcrafter]

Here's an article on Income Discovery which you might find interesting. Income Discovery is for those very close to or in retirement. It was in beta when the article was written, but I think it's now fully functional, and although it's an advisor's tool, I think you may be able to try a test run for free

http://www.fa-mag.com/news/income-discovery-7142.html

Parameters

https://incomediscovery.zendesk.com/entries/22903523-income-parameters-basic-configuration-of-the-income-plan

Paul

[mickeyd]

MMP seems to be an interesting concept but it also adds a level of complexity that would not be attractive to me. Perhaps others may find it effective.

[Bustoff]

No matter how little desired income used, it kept comming up with "unfortunate retiree".

[umfundi]

Paul,

Interesting. Thank you for the link. All I can say is, it's about time!

I retired in 2008, but a DB pension and a part time job mean I have not yet had to tap my savings. In the meantime I have come to appreciate that planning to withdraw from your nest egg is a totally different proposition than saving or accumulating. And, there is precious little good advice out there. Eventually I discovered Jim Otar, Michael Zwecher and then Christine Benz, so I think I now have a much better understanding.

I think that something like MMP (if I understand it correctly) is the best way to go. But, the success of a plan depends on future events, which are unknown. So, I firmly believe there is no "set and forget" strategy for decumulation. (There is, of course one for accumulation.) The plan should be monitored at least yearly.

The good thing about that is that bad things can only happen in the first year of the rest of your plan. Let's say your strategy is X years of cash, so you can be less affected by market downturns. Well, in normal circumstances you will annually replenish your cash to X years, rinse and repeat. It is only if something bad happens that you would question selling in a down market to replenish cash, or not rebalance into stocks, or whatever. By definition, if you recast the plan every year, the surprises only happen in the first year of the rest of your plan.

One issue that is never mentioned is the "pay it forward" risk. It is analogous to the sequence of returns risk.

When I look at my income needs and desires, they are very uneven. I retired early at age 58, and got a nice pension supplement. That supplement expires this month since I am age 62 and can get SS. But, I plan to delay claiming SS for the rest of the decade. At age 65 my company health care disappears and I have to get Medicare/aid. Our youngest starts college in the fall. I'd rather spend money on travel during my 60s than my 80s. My wife is 3 years younger than me, so she has a different timeline.

If I mash all of this together, I am looking at substantially bigger needs to use my savings in the next ten years than after that. The costs go down in my 70s, and then rise again due to medical care and to compensate for inflation. I know of no one who will make a plan that accounts for such variations.

4% and age in bonds are completely inadequate ideas.

Best wishes,

Keith

[bertilak]

Paul,

I tried this out and I like the general idea. I did run into a situation that I don't understand...

I entered my parameters and it showed me a 20% failure rate but at the same time a legacy of over $1,000,000. Why doesn't it use that projected legacy to bump up my success rate?

I think the answer might be something to do with worst-case scenario vs. average scenario, but I didn't see the failure/legacy relationship explained anywhere in their knowledge base. If possible I think an additional parameter -- acceptable legacy -- might be useful but perhaps they already assume a zero legacy is acceptable. Do you have any insight on this?

[mlewis]

Keith,

Good post. Especially the last sentence. People need to do more work on this.

I've always been surprised by the monte carlo simulations that will say a plan "fails" x% of the time if the balance drops below $1. What happens if it drops to $2, it's a success? Clearly if your plan drops to a level where you only have a few years expenses in the account, it is at a perilous level and you change course if you haven't done so already. Either that or you check your life clock pretty regularly and hope to die soon.
These simplified strategies make little sense to me.

malcolm