Transition to Old Age (Superannuation) in a 3-D, Age Based, Dynamic, Serially Connected and Annually Recalculated Retirement Distribution Model

35 Pages Posted: 2 May 2012 Last revised: 1 Jun 2012

See all articles by Larry R. Frank Sr

Larry R. Frank Sr

Academy of Financial Services; Better Financial Education; Certified Financial Planner Board (CFP)

John B. Mitchell

Central Michigan University - Department of Finance and Law

David Blanchett

Morningstar Investment Management

Date Written: May 2, 2012

Abstract

Past research on the topic of sustainable withdrawal rates has primarily focused on longer distribution periods which apply to younger age retirees.

A structural problem with pensions, annuities, and first generation "safe withdrawal rate" 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 are variable and may decrease in value, temporarily or permanently, due to market or economic forces. A sustainable methodology needs to keep benefits connected to supporting asset values year by year throughout the entire distribution period.

This research project seeks to answer the following questions regarding superannuation (continuing to survive and live into very old ages): - What does the withdrawal rate profile need to look like for a retiree who survives into extreme old age (superannuation)? - What should the withdrawal rate sequence be in order to sustain portfolio values sufficient to continue cash flows from old retirement ages throughout superannuation?

Sequence Risks, Distribution Periods (Longevity Percentiles), Asset Allocations and Superannuation represent the factors incorporated into four “levers” available to practitioners to measure and manage sustainable distributions from the earlier retirement years through superannuated retirement ages.

High cash flows during early retirement years deplete the portfolio values such that cash flows are reduced during later retirement years. How does a practitioner measure this effect so as to manage cash flows both for the present and future?

Dynamic, serially connected, and annually recalculated, cash flows based on age and longevity percentiles provide insights into retirement distribution tradeoffs.

Keywords: Retirement Planning, Adjustable Withdrawal Rates, Sequence Risk, Probability of Failure, Expected Longevity, Elderly, Mortality, Age Distribution, Cohorts, Superannuation

JEL Classification: D14, D81, D90, G11, G17, J11, J14

Suggested Citation

Frank Sr, Larry R. and Mitchell, John B. and Blanchett, David, Transition to Old Age (Superannuation) in a 3-D, Age Based, Dynamic, Serially Connected and Annually Recalculated Retirement Distribution Model (May 2, 2012). Available at SSRN: https://ssrn.com/abstract=2050003 or http://dx.doi.org/10.2139/ssrn.2050003

Larry R. Frank Sr (Contact Author)

Academy of Financial Services

La Crosse, WI 54601
United States

HOME PAGE: http://academyfinancial.org

Better Financial Education ( email )

300 Harding Blvd Suite 103D
Roseville, CA 95765
United States
916-303-7777 (Phone)

HOME PAGE: http://www.BetterFinancialEducation.com

Certified Financial Planner Board (CFP) ( email )

1700 Broadway
Suite 2100
Denver, CO 80290-2101
United States

John B. Mitchell

Central Michigan University - Department of Finance and Law ( email )

328 Sloan Hall
Mount Pleasant, MI 48859
989-774-3651 (Phone)

David Blanchett

Morningstar Investment Management ( email )

22 W Washington
Chicago, IL 60602
United States
859-492-5637 (Phone)

HOME PAGE: http://www.davidmblanchett.com

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