Retirement Research: Rich Retirees Don't Have to Worry About Running Out of Money
Spending in Retirement
Abstract: Retirement savings adequacy estimates are often based on the assumption that individuals spend the same amount every year in retirement, and that the withdrawal rate to fund spending is based on spending down a percentage of retirement savings. The researchers simulate safe consumption rates and compare the amount that wealthy retirees are spending to the amount they could safely spend given different asset return assumptions and investment portfolio allocations. Retirees in the top quintile of financial wealth are spending nowhere near an amount that would place them in danger of running out of money. In fact, the average financial assets of wealthy retirees increased during this time period and most retirees spent less than their income. Setting aside 40% of financial assets to cover uncertain longevity, medical costs, and bequests still results in a consumption gap as high as 47.3.% among higher-wealth retirees. Read Spending in Retirement.
Retirement Planning: From Z to A
Abstract: Retirement planning is an issue that must be tackled early and solved backward. It must be tackled early because with a few working years to go there is little that can be done if an individual is not on the right path; and it must be solved backward because it makes little sense to aim for a portfolio that may not be able to sustain the desired lifestyle in retirement. This article introduces an approach that integrates the working period and the retirement period; leads the individual to consider all the relevant variables at the beginning of his journey; and enables him to start saving early to build a target portfolio specifically designed to sustain a desired retirement. The analytical framework introduced yields closed-form solutions for the target retirement portfolio and the contributions that need to be made during the working years to hit that target. The framework proposed is illustrated with an empirical base case, sensitivity analysis, and Monte Carlo simulations. Read Retirement Planning: From Z to A.
Spend More Today Safely: Using Behavioural Economics to Improve Retirement Expenditure Decisions
Abstract: This paper examines how behavioural economics can be used to improve the expenditure decisions of retirees, using a SPEEDOMETER (or Spending Optimally Throughout Retirement) retirement expenditure plan which employs defaults within a choice architecture. The plan involves just four key behavioural nudges: (1) First, make a plan – ideally with an adviser; (2) automatic phasing of annuitization which is designed to tackle the aversion to large irreversible transactions and losing control of assets and so allows the greatest possible degree of flexibility in managing the run-down of retirement assets; (3) capital protection in the form of ‘money-back’ annuities which deals with loss aversion, i.e., the fear of losing your money if you die early; and (4) the slogan ‘spend more today safely’ which utilizes hyperbolic discounting to satisfy the human trait of wanting jam today and to reinforce the idea that ‘buying an annuity is a smart thing to do’. Read Spend More Today Safely: Using Behavioural Economics to Improve Retirement Expenditure Decisions.
Correcting Excess Contributions to IRAs
Abstract: Taxpayers are generally eligible to make regular annual contributions to their IRAs that are limited to fixed dollar amounts established by statute. The contributions are further limited to the amount of the taxpayer’s taxable compensation. Contributions to IRAs in excess of those limits (excess contributions) are generally subject to a 6 percent excise tax. The 6 percent excise tax may also apply to a failed rollover to a traditional IRA from another traditional IRA or from a qualified retirement plan. A failed Roth conversion from a qualified plan or traditional IRA may be similarly treated.
Depending on circumstances, a taxpayer may be able to eliminate an excess contribution attributable to a regular contribution to a traditional IRA by using either a corrective distribution, a dollar-limited distribution, an ordinary distribution, absorption, or recharacterization.
The techniques for eliminating the excess contribution part of a failed rollover to a traditional IRA are generally the same. However, most of those techniques do not solve the problem of the taxability of the distribution part of a failed rollover. Nevertheless, under certain limited circumstances, a dollar-limited distribution may be particularly useful in eliminating the excess contribution part of a failed rollover to a traditional IRA. In addition, for a few types of failed rollovers, recharacterizations may be particularly effective at both eliminating excess contributions and making the distribution part of the failed rollover nontaxable.
Depending on the circumstances, a taxpayer may be able to eliminate an excess contribution attributable to a regular contribution to a Roth IRA by using either a corrective distribution, an ordinary distribution, absorption, or recharacterization. The techniques for eliminating the excess contribution part of a failed Roth conversion are generally the same. However, most of those techniques do not change the continuing taxability of the distribution part of a failed Roth conversion. That is where recharacterizations might play a more significant role.
Optimal Investing after Retirement Under Time-Varying Risk Capacity Constraint
Abstract: This paper explores an optimal investing problem for a retiree facing longevity risk and living standard risk. We formulate the optimal investing problem as an optimal portfolio choice problem under a time-varying risk capacity constraint. Under the specific condition on model parameters, we show that the value function is a $C^2$ solution of the HJB equation and derive the optimal investment strategy in terms of second-order ordinary differential equations. The optimal portfolio is nearly neutral to the stock market movement if the portfolio's value is at a sufficiently high level; but, if the portfolio is not worth enough to sustain the retirement spending, the retiree actively invests in the stock market for the higher expected return. In addition, we solve an optimal portfolio choice problem under a leverage constraint and show that the optimal portfolio would lose significantly in stressed markets. This paper shows that the time-varying risk capacity constraint has important implications for asset allocation in retirement. Read Optimal Investing after Retirement Under Time-Varying Risk Capacity Constraint.