Retirement Income Research Findings With David Blanchett

One of the goals of the New York Life Center for Retirement Income is to share some of the latest research in the field of retirement income planning. In a recent interview with the prolific researcher David Blanchett, who will soon join The College as an Adjunct Professor of Wealth Management, we discuss two important research areas: whether or not to change asset allocation with age, and the importance of making dynamic withdrawal and annuitization decisions.

Choosing the Appropriate Equity Glide Path

The question of whether a retiree should reduce their allocation to equities as they age through retirement is a tricky one. Referred to as the equity glide path, we have seen research that supports a steady equity allocation through retirement, other research from Wade Pfau and Michael Kitces that supports an increasing equity allocation as retirement progresses, and research that supports the more traditional view of a decreasing equity glide path.

Blanchett is one of the voices suggesting that for many retirees, the best option is a more traditional approach of a decreasing equity glide path. Blanchett, who is also head of retirement research for Morningstar Investment Management LLC, has written several articles on this topic. One excellent article is called “Exploring the Optimal Equity Allocation Path for Retirement,” which can be found in the AAII Journal.

In the video “The Case for Decreasing Equity Glide Path Through Retirement,” Blanchett shares his view on this topic. Before discussing the average case, he’s careful to point out that selecting the appropriate glide path depends upon the goals, objectives, and risk tolerance characteristics of the client. However, after looking at a wide range of scenarios, his research supported the conclusion that a decreasing equity glide path is the best option for the average retiree. He also points out that his research conclusions are reinforced by another consideration, that many individuals show a decreasing risk tolerance as they age.

David Blanchett discusses his research on choosing the appropriate equity glide path through retirement

Dynamic Decision Making in Retirement

In the video “The Case for Making Dynamic Withdrawal and Annuitization Decisions Throughout Retirement,” Blanchett discusses his paper called “Dynamic Choice and Optimal Annuitization,” which was published in the Journal of Retirement. Blanchett makes the case that “dynamic” strategies in which annuitization and withdrawal amount decisions are revisited throughout retirement may have the potential to provide greater benefits to retirees than “static” strategies. He explains that much existing research focuses on static models in which retirees choose one constant strategy at the time of retirement that is followed throughout the entire retirement period. Contrastingly, dynamic models allow retirees to revisit their decision making throughout their retirement in order to adjust for changing, more realistic personal as well as economic circumstances.

Blanchett tested 27 different scenarios to determine the impact of making dynamic vs. static decision making. He looked at three different factors: income shortfall risk preference, bequest preferences, and life expectancy expectations of a hypothetical retiree. For each factor, he considered the possibility of low, moderate, or high concern. Results supported Blanchett’s underlying notion that reconsidering withdrawal amounts as circumstances develop is critical when optimizing retirement income.

In addition, Blanchett addresses those retirees who may be hesitant to annuitize within their retirement plans. He points out that the cost of deferring the annuitization decision a few years may have minimal cost; however, deferring by more than 10 years could result in a significantly worse outcome.

Overall, Blanchett emphasizes the value that a financial advisor can bring to a client by utilizing a powerful dynamic strategy. Revisiting a retiree’s original retirement plan and adjusting decisions based on evolving circumstances will result in more pragmatic and lucrative outcomes.

David Blanchett discusses his research on the value of making dynamic decisions throughout retirement concerning the appropriate withdrawal rate and whether or not to annuitize.

 

This blog is part of a series by Professor David Littell, Director of the RICP® program and Co-director of The American College New York Life Center for Retirement Income. Each post in this series features a video or videos from the Center offering valuable retirement income planning tips for advisors and their clients. Many of the experts in these videos are featured in the RICP® program curriculum.