PlanPlus president wins award for research into withdrawal rates

By Andrew Rickard | November 01 2016 09:45AM

At the annual meeting of the Academy of Financial Services (AFS) in the United States Shawn Brayman, the founder and president of PlanPlus, and co-author Larry Frank Sr. won an award for their research into retirement income planning.

In the paper they submitted to the AFS, Brayman and Frank consider various actuarial approaches for calculating withdrawals in retirement using Monte Carlo simulations.

They note that fixed-period simulations and deterministic calculations ignore the influence of mortality. “Even actuarial calculations fundamentally rely on a single time horizon assumption for each calculation of the payment amount. However, when one also considers the effect where one moves through the mortality tables as one ages, the time periods are not fixed,” reads the paper. “An error in cash flow (and resulting portfolio balances) results, because the last period of a fixed-period simulation is only one year long, while those still alive at that later age have more than one year of expected longevity.”

A different Continually Adjusting Stochastic Actuarial Model 

To deal with this issue Brayman and Frank propose a different Continually Adjusting Stochastic Actuarial Model (CASAM) which recalculates withdrawals for each scenario based on the amount of capital remaining and which uses mortality tables to adjust the time horizons. CASAM also allows for increased spending in earlier years as opposed to approaches that may overly constrain income for the client.

"A higher mortality-weighted total income resulted in all cases using the CASAM model. Retirees would receive money to spend when they were more likely to be alive through the use of applying rolling life table time periods judicially as they aged," conclude the authors. "Results showed a higher internal rate of return in all cases using the CASAM model."

The paper received the AFS-CFP Board Award for Best Retirement Planning Research and is now available on the Journal of Financial Planning web site.

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