Latest research into sustainable retirement distributions

A structural problem with pensions, annuities, and first generation “safe withdrawal rate” methodology, is a disconnect of benefits paid (fixed or fixed with COLAs) from the underlying asset values required to support those promised benefits. Underlying asset values supporting retirement in any scheme are variable and may decrease in value, temporarily or permanently, due to market or economic forces (yes, they may go up, but that’s not a problem unless spending outstrips sustainability). A sustainable methodology needs to keep benefits connected to the supporting asset values year by year throughout the entire distribution period.

My collaborators and I have posted our latest working paper at SSRN (Social Science Research Network) that demonstrates a methodology to measure sustainable distributions throughout a retiree’s lifetime into very old ages (superannuated). This working paper is being refined for submission to the peer-review process at the Journal of Financial Planning soon.

Both the Annuity 2000 and Social Security longevity tables were used in the study. The Annuity 2000 table results in slightly longer distribution periods due to a “healthier” population sample as compared to the Social Security table. The research is based on earlier work* of my collaborators and mine that established a method to annually recalculate and serially connect portfolio value balances that result from both retirement income withdrawals as well as randomly simulated market returns.


An interesting finding in this paper demonstrates that indeed a retiree may try to take more out during their earlier years. However, that comes at the cost of reducing portfolio values (obviously because they took more out) which reduces potential future withdrawals for income (even comparing good versus bad markets). Thus, there is no ability to have your cake (take more out now) and eat it too (take even more out later).

This research forms the basis for ongoing evaluations for retired clients so they reduce their risk of overspending their resources and therefore running out of money before they run out of time and is used in my Emergency Procedures simulator.

Note: This research does not guarantee a fixed income (that’s the structural problem I referenced at the beginning). This research presents a method to keep spending in line with the value of retirement assets that fluctuate due to economic and market forces.


*  Main findings of our collaborated research by paper:

June 2010:           – Sequence risk does NOT go away … ie., it does not matter when a retiree retires, they will always be exposed to the effects of the sequence of market returns (bad sequences/down markets are the ones that cause problems with ALL retirement plans).

Nov 2011:            – Sequence risk does NOT go away (reinforced the earlier finding through a different methodology).

– Changing the portfolio allocation does NOT improve sustainability of distributions (ie., avoiding or chasing returns does not improve distribution probability over and above static allocations … so realistic structure of allocation in line with your true risk is important … and SSRN paper below, and that of Pfau referenced in that paper, suggest there may be optimal allocations based on retiree age)

– How to measure when to take action and what action to take to improve odds retiree may not outlive their portfolio based on percent of simulations that fail measurements.

March 2012:       – First ever demonstration how to change from single period distribution periods used by researchers in the past, to serially connected, annually recalculated periods that are based on current age and longevity percentile from longevity tables (this reflects real life that dynamically changes as the retiree ages), and incorporates the 3-dimensional model developed in the Nov 2011 paper as well as decision rules for spending retrenchments if needed.

SSRN working paper (paper referenced above in this blog: extends the March 2012 research by adding how to transition from young retirement ages to old retirement ages into superannuated ages, i.e., how to self-manage retirement assets rather than annuitize them).


About Larry Frank, Sr.

Larry R Frank Sr., MBA, CFP®, is an experienced financial advisor and a published author on Retirement Planning Research. Have a financial question? Click Here to Ask Larry

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