Morningstar Advisor - October/November 2012 - (Page 66)

Gray Matters Retirement-Withdrawal Strategies Quantified By David Blanchett, Maceij Kowara, and Peng Chen According to a new Morningstar metric, the best approach incorporates portfolio value and life expectancy. A significant amount of research has been devoted to determining how much a retiree can afford to withdraw from a retirement portfolio, but surprisingly little work has been done on comparing the efficiency of different types of retirement-withdrawal strategies. Our study establishes a framework to evaluate the efficiency of several withdrawal strategies. We also use that framework, in conjunction with Monte Carlo simulations, to determine the most optimal strategies for different retirement scenarios. To establish the framework, we introduce a new metric, the Withdrawal Efficiency Rate. WER compares the withdrawals received by a retiree who followed a specific strategy to what the retiree could have been obtained if he or she had “perfect information” at the beginning of retirement. This measure allows us to quantify the appeal of each retirement- withdrawal approach. It thus creates a framework to determine how best to generate income from a portfolio. Because maximizing retirees’ withdrawals, subject to their budget constraints, is a critical aspect of building a successful retirement plan, this framework should help both retirees and their advisors determine a more secure foundation for retirement spending. In particular, we will show that spending plans 66 Morningstar Advisor October/November 2012

Table of Contents for the Digital Edition of Morningstar Advisor - October/November 2012

Morningstar Advisor - October/November 2012
Letter From the Editor
Ill Communication
Do You Use Factor-Investing Strategies?
Practicing What She Preaches
How to Determine the True Price of ETFs
The Quant Factor
Managers Dispute the Death of Equities
Investments á la Carte
Investment Briefs
Five Inconvenient Truths of Manager Research
Health Care’s Outlook Clarifies
Exploring the World of Factors
Uncloaking the Alpha Machine
Factor Strategies Gain Footholds in Practices
Big Mo
Fitting Factors Into the Formula
Clients Have a Friend in Luther King
Less-Liquid Holdings Mean More-Solid Results
Retirement-Withdrawal Strategies Quantified
Amid Turmoil, Don’t Discount Foreign Equities
Our Favorite Mutual Funds
50 Most-Popular Equity ETFs
Undervalued Stocks With Wide Moats
Should I Stay or Should I Go?

Morningstar Advisor - October/November 2012