Sequence Risk: Managing Retiree Exposure to Sequence Risk Through Probability of Failure Based Decision Rules

Larry R. Frank Sr., John B. Mitchell, David M. Blanchett

Abstract


  • This paper broadens the perspective on sustainable distributions by expanding into three dimensions, introducing transitory states as well as all those states existing simultaneously.
  • Withdrawal rates alone do not tell a complete sustainable distribution story; withdrawal rates are time dependent.
  • The Probability of Failure (POF), a time independent variable, is more useful for true comparison of withdrawal rates over any time period or asset allocation.
  • Comparison of POF surfaces, and their shift between strategies, illustrates how effective one strategy is as compared to another.
  • The methodology presented provides an ability to evaluate sustainable withdrawal rates and exposure to sequence risk together.

Full Text:

PDF

References


Blanchett, D. M., and Frank, L. R. (2009). A dynamic and adaptive approach to distribution planning and monitoring. Journal of Financial Planning, 22, 52-66.

Frank, L. R. and Blanchett, D. M. (2010). The dynamic implications of sequence risk on a distribution portfolio. Journal of Financial Planning, 23, 52-61.

Garrison, M. M., Sera, C. M. & Cribbs, J. G. (2010). A simple dynamic strategy for portfolios taking withdrawals: Using a 12-month simple moving average. Journal of Financial Planning, 23, 51-61.

Guyton, J. T. (2004). Decision rules and portfolio management for retirees: Is the “safe” initial withdrawal rate too safe? Journal of Financial Planning, 17, 54-62.

Guyton, J. T. and Klinger, W. J. (2006). Decision rules and maximum initial withdrawal rates. Journal of Financial Planning, 19, 49-57.

Liu, Q., Chang, R. P., De Jong, J. C., & Robinson, J. H. (2009). Reality check: The implications of applying sustainable withdrawal rate analysis to real world portfolios. Financial Services Review, 18, 123-139.

Mandelbrot, B. and Hudson, R.L. (2004). The (mis)behavior of markets: A fractal view of financial turbulence. New York: Basic Books.

Mitchell, J. B., (2009). Withdrawal rate strategies for retirement portfolios: Preventive reductions and risk management. Presented at Academy of Financial Services, 2010, Anaheim, CA, http://ssrn.com/abstract=1489657.

Pye, G. B. (2008). When should retirees retrench? Later than you think. Journal of Financial Planning, 21, 50-59.

Spitzer, J. J. (2008). Retirement withdrawals: An analysis of the benefits of periodic “midcourse” adjustments. Financial Services Review, 17, 17–29.

Stout, R. G. (2008). Stochastic optimization of retirement portfolio asset allocations and withdrawals. Financial Services Review, 17, 1-15.

Stout, R. G. and Mitchell, J. B. (2006). Dynamic retirement withdrawal planning. Financial Services Review, 15, 117-131.

Taleb, N.N. (2007). The black swan: The impact of the highly improbable. New York: Random House.

Tomasula, P. D. (2009). Constructing and defending portfolios during chaotic markets. Journal of Financial Planning, 22, 38-47.


Refbacks

  • There are currently no refbacks.


Copyright (c) 2022 Larry R. Frank Sr.

Creative Commons License
This work is licensed under a Creative Commons Attribution 4.0 International License.

Creative Commons License
This work is licensed under a Creative Commons Attribution 4.0 International License.