Think Tank Session #3

Think Tank Session #3

Decumulation Institute organized its third Think Tank Session in May 2015. The participants included Michael Peskin, former Managing Director and Head of Pensions at Morgan Stanley, NY; Malcolm Hamilton; Don Ezra; Bill Chinery; the financial columnist Jonathan Cheverau; fund governance leader Tom Iannucci; Paul Purcell; Earl Bederman, CEO Investor Economics and John T. Por.

The discussions covered the following:

  • Don Ezra presented a spreadsheet-based model, which enable retirees and their advisors to estimate the required equity component they need in their portfolio to support their lifestyle taking into account longevity risks. The model can be used for building scenarios for different assumptions and can calculate the individual’s personal funded ratio.
  • The follow-up discussions centered on the dangers of using such model by inexperienced hands and how to estimate the minimum, life style and bequest spending. It concluded that while current thinking is targeting a relatively high income replacement (approx. 100% funded ratio), empirical evidence suggests that actual retirees are quite capable of adapting to their income levels, and most have a richer life style than they enjoyed in their primary accumulation period ending at 10-15 years prior to retirement. In this light, governmental concerns about the low level of savings seem unjustified.
  • While the appropriate replacement ratio is key to any pragmatic modeling, calculations and advice, to date the advisors pay little attention to this vital, high impact topic. A future Thank Tank session will be dedicated to both academic and empirical findings how such ratio could be best modeled.
  • Finally the group discussed the value advisors are currently providing and could add to retirees’ portfolios using a recent publication by Morningstar. It turns out that advisors could significantly improve retirement incomes but not through current practices, such as fund selection, market timing and static withdrawal rates and asset allocation.

Other activities quoted in the Morningstar article—rarely performed today—are estimated to have the potential of adding an alpha equivalent of 182 basis points without volatility. DI was directed to pursue discussions with Morningstar how to apply such findings in practice.