Joined

·
1,165 Posts

1 - 20 of 23 Posts

Joined

·
1,165 Posts

Joined

·
2,686 Posts

Joined

·
5,464 Posts

For a detailed (theoretical) look at how pensions can impact sustainable withdrawal rates in retirement, you could also read this recent Milevsky and Huang paper, forthcoming from the Journal of Financial Planning - "Spending Retirement on Planet Vulcan."

p.s. I hold the Certified Financial Planner designation but I do not work as a financial planner providing advice to individuals.

Joined

·
1,165 Posts

Thanks MG. Perfect response. I will read the papers.

Joined

·
1,165 Posts

At the beginning of retirement, with 30 years life expectancy remaining, a non-indexed pension of $x annually would be worth about 17.3x. I'd say it's fair to treat pension income as bond-like.

Joined

·
1,165 Posts

This sounds reasonable. Thanks. On this basis my pension is about 40% of my total "nest egg" Not an unreasonable ratio. It's probably worth more based on the article mentioned above as it reduces my longevity risk. Do planners view it this way?

At the beginning of retirement, with 30 years life expectancy remaining, a non-indexed pension of $x annually would be worth about 17.3x. I'd say it's fair to treat pension income as bond-like.

Joined

·
5,464 Posts

You can calculate the actuarial present value (APV) of a pension, whether it is CPP or a DB pension. The discount factor is one element - the longevity calculations are the other main factor.

AndrewF: Careful about using life expectancy, not survival probabilities. Using a static life expectancy number is as problematic as assuming a static rate of return (actually, more problematic, as life expectancy is more variable than stock markets).

W/r/t optimal asset allocation - we don't get deeply into this in the book, but there are "sweet spots" in allocating assets depending on a number of factors, including age, withdrawal rate, gender, % of income that is pensionized, desire for a financial legacy vs. desire for more sustainability of income in retirement, etc. The relationship is surprisingly non-linear. We use a variety of algorithms (not Monte Carlo simulations) to find optimal portfolio allocations (not for readers of the book - that's what the company I work for does among other things).

We are just fine-tuning the online calculator that will (accompany the book and) allow users to play around with scenarios to find optimal results for their desired parameters. I'm also editing a couple of videos which are intended to explain the basic concept of the sustainability-legacy frontier (think of the risk-reward frontier) in more detail. Those videos will be posted on our corporate web site.

The book itself is supposed to be available for ordering at the end of August. I haven't personally held a copy in my own hands yet! However, most of the analytics supporting increased pensionizationTM are set out in the Vulcan paper.

If so, I'm embarrassed to be suggesting such ham handed things as using a life expectancy. I see your point, but in terms of creating a rough valuation, people are more likely to have access to reasonable life expectancies than survival rates.

On the other hand, I see some risk in falling in love with nice models. We see what happens when quants use theory in the real world, ignore the assumptions (such as that loan defaults are uncorrelated) and other limitations of the model, and lay waste to the world financial system.

Joined

·
1,165 Posts

Joined

·
6,870 Posts

For the purpose of my die-broke spreadsheet, I use 101yo so I am being very conservative! That leaves me with a 10% chance of really dying broke!

Joined

·
1,165 Posts

Interesting but not sure I follow-when you say 10% to 90% does this mean you have a 10% chance of living to 101? Seems pretty high unless you are already pretty advanced in years? Also, once you have valued the pensions as fixed income is your target allocation in the usual 40/60 or 60/40 range?

For the purpose of my die-broke spreadsheet, I use 101yo so I am being very conservative! That leaves me with a 10% chance of really dying broke!

This is partly why I have limited sympathy for people who moan that they have to put off their retirement because they portfolio allocation was 80% equities (or even 100%) when the market corrected a few years ahead of their planned retirement date.

Joined

·
5,464 Posts

That is, are you suggesting that 60-70% of a retiree's income stream should be from pensionized sources, or 60-70% of their investable wealth (including APV or CPP as an exception + APV of any DB pensions) should be pensionized?

If it's the second, it is rare that this will be an optimal solution - that is, after a certain tipping point, there is no more sustainability to be gained from pensionizing a larger fraction of your nest egg, while the cost to your expected financial legacy is real.

Hope that makes sense. I should be able to demonstrate this once the online calculator is up. I should probably write a technical note on this as well.

Joined

·
1,165 Posts

Joined

·
1,165 Posts

Not sure why you think I would be looking for sympathy and maybe for some people a 70% allocation would be appropriate. I need to cover inflation on both the portfolio returns and the pension as it is not adjusted for COLA. Given my circumstances which require only spending dividends from the portfolio I don,t really understand why I should include fixed income in the portfolio given the generous pension I will be getting. I am very interested in testing this theory so blast away I'm open to criticism.

1 - 20 of 23 Posts

Join the discussion

Canadian Money Forum

A forum community dedicated to Canadian personal finance enthusiasts. Come join the discussion about investing, stock portfolios, equities, frugality, real estate, market trading, taxation, retirement, and more!

Full Forum Listing
Recommended Communities

Join now to ask and comment!