JEFMS Journal

ABSTRACT:

Very little research has been done on strategic financial planning software programming. Today's approach is to perform a single simulation, calculation, or utility application and assume the results apply to all times and allocations for all future ages. But time periods change with age as do allocation characteristics over time. This paper steps back to look at financial planning software programming as a foundational strategy to model retirement income while aging that same retiree over time, meaning looking at all the possible future time periods as well as all prudent allocations over those possible future time periods. Additionally, research to date has focused on “early stage” retirement meaning the retirement event occurs sometime in the retiree’s age-60’s. In other words, the inception of retirement. Little research has been done looking at the transition into later stage ages or later allocations for portfolio income distributions through “late stage” retirement years. It is not enough to know how to initiate retirement. It is also necessary to know how to sustain retirement spending prudently, as well as how spending decisions ripple through age to future bequest balances. This paper reviews concepts on how to imagine that transition to and through late-stage retirement and develop better software programming using a data cloud concept to accomplish that early-to-late stage retirement income modeling based on research evidence. The author is a practitioner nearing nearly three decades specializing in research and application of drawdown of portfolios for supplemental retirement income, clinically with many different retirees of many different ages all at the same moment in time. The author also has numerous research papers published in the Journal of Financial Planning and numerous other published papers leading to the thoughts in these referenced papers and below. The author suggests integrating many different disciplines is important to advancing retirement income planning into more focused modeling, rather than today’s single simulation approach.

KEYWORDS:

Financial Markets, Probabilities, Statistical Methods, Financial Services, Personal Economics, Software Programming
JEL Classification: C1, C5, C6, G4, G29, M5

REFERENCES:

1) Blanchett, David M., and Brian C. Blanchett. 2008. “Joint Life Expectancy and the Retirement Distribution Period.” Journal of Financial Planning 21 (12): 54–60.

2) Mitchell, John B. 2010. “A Modified Life Expectancy Approach to Withdrawal Rate Management.” Working paper: http://ssrn.com/abstract=1703948

3) Frank, Larry R., John B. Mitchell, and David M. Blanchett, 2011. “Probability-of-Failure-Based Decision Rules to Manage Sequence Risk in Retirement.” Journal of Financial Planning 24 (11): 44–53. Working paper: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=1849868

4) Savage, Sam L. (Author), Jeff Danziger (Illustrator), Harry M. Markowitz (Foreword). The Flaw of Averages: Why We Underestimate Risk in the Face of Uncertainty. Hoboken, NJ, John Wiley & Sons, Inc., 2012.

5) Frank, Larry R., John B. Mitchell, and David M. Blanchett. 2012a. “An Age-Based, Three-Dimensional Distribution Model Incorporating Sequence and Longevity Risks.” Journal of Financial Planning 25 (3): 52–60. Working paper: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=1849983

6) Frank, Larry R., John B. Mitchell, and David M. Blanchett. 2012b. “Transition through Old Age in a Dynamic Retirement Distribution Model.” Journal of Financial Planning 25 (12): 42–50. Working paper: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2050003

7) Frank, Larry R., John Mitchell, and Wade Pfau. 2014. “Lifetime Expected Income Breakeven Comparison between SPIAs and Managed Portfolios.” Journal of Financial Planning 27 (4): 38-47. Working paper: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=%202317857 contains the data, figures and appendices that support the work described in more detail in https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2352252.

8) Blanchett, David. 2014. “Exploring the Retirement Consumption Puzzle.” Journal of Financial Planning 27 (5): 34–42.

9) Suarez, E. Dante. 2020. “The Perfect Withdrawal Amount Over the Historical Record.” Financial Services Review, The Journal of Individual Financial Management. Volume 28, No.2: 96-132.

10) Frank, Larry R., and Shawn Brayman. 2016. “Combining Stochastic Simulations and Actuarial Withdrawals into One Model.” Journal of Financial Planning 29 (11): 44–53. Working Paper: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2769010

11) Savage, Sam L. (Author), Jeff Danziger (Illustrator), Douglas W. Hubbard (Foreword). Chancification: How to Fix the Flaw of Averages. Kindle 2022. Print pending.

12) Frank, Larry R. 2022. “What are the Three Paradigms of Retirement Income Planning?” Working paper: SSRN abstract ID pending (paper by the title may be found on author’s SSRN page).

13) Appendix 1. Example efficient allocations with characteristics and asset class data incorporated.