A Rebuttal to: An Adage Adjustment for Investors at Retirement [NY Times 9/13/2013]
Judging from the more than 125 first day comments, it appears that the above-referenced NY Times piece is causing quite a stir. In my opinion, the study described in this article has some problems. Below are my comments to the article’s author:
While such controversial studies offer great fodder for debate, I believe the Pfau-Kitces study, as described in this article, has at least two potentially flawed assumptions –
- An implicit assumption in the study is that retirees sell a portion of their equities each year. While the authors are wise to point out the threat posed by sequence of returns risk (the risk of down markets early in retirement), research has shown that such risk can be ameliorated by spending cash/bonds during down markets instead of spending down the equities.
- If the researchers’ internal capital markets assumptions (i.e., future mean market returns and volatility) are wrong, then the analysis is simply garbage-in, garbage-out. Also, this form of analysis assumes normal return distributions. Real world returns are not normally distributed. Not sure this form of Monte Carlo analysis is the best choice for this study.
More generally speaking, the notion of the average retiree converting his or her portfolio from a traditional, equity weighted “working man’s” allocation to a much more “conservative” allocation of 20-30% equities at retirement would seem to inject an element of timing risk. It also seems implausible that real world retirees would actually increase their equity allocations by 1% per year.
While I am not sure this study provides justification to rethink retirement income planning, it does remind me of a terrific paper from the June 2007 issue of Journal of Financial Planning, entitled “Is rebalancing a portfolio in retirement necessary?” In it, the authors make a compelling case for spending down the bond/cash portion of a portfolio first instead of the more conventional constant allocation/rebalancing approach or increasingly conservative glidepath strategies. To me, the approach advanced by Sptizer & Singh seems more plausible.
-J.R. Robinson, CEO Nest Egg Guru