Modeling Retirement Income

Jahnke, William
February 2005
Journal of Financial Planning;Feb2005, Vol. 18 Issue 2, p22
Academic Journal
This article addresses issues pertaining to the traditional practice in retirement planning in the U.S. as of February 2005. Not long ago, the conventional practice was to formulate asset allocation solutions and model retirement income based on historical asset class returns. Little or no consideration was given to earnings prospects or valuation levels. Insufficient attention to cost and taxes was common. Recently, a number of thought leaders have challenged one or more aspects of the practice, including Peter Bernstein, William Sharpe, Marty Leibowitz, and Harold Evensky. Bernstein set the cat among the pigeons in 2003 when he declared the policy portfolio obsolete. Not only did Bernstein disclaim the well-established practice of setting an asset allocation and sticking with it, he blasted the idea of extrapolating historical returns. Sharpe, chief scientist at Financial Engines, is likewise critical of the practice of extrapolating historical returns. According to Sharpe, some consultants look at a historic period and take the average return which is typically a rotten estimate of expected return. Then they tweak them, and then they round them. Sharpe attacks the current practice of portfolio formation due to its failure to model the portfolio's asset allocation and cash-flow-generating prospects based on the characteristic of the actual securities or funds held in the portfolio.


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