Dynamic Retirement Financial Planning Model 1

Transcript:Dynamic Retirement Financial Planning Model 1:
Dynamic Retirement Financial Planning Model 1 Michael L. Smith Justin Xu Yuance He 2 Background Research work on this topic has generated two PhD theses in actuarial science – Justin Xu and Qintian Sun Research work has been applied to develop cutting-edge financial planning models for JourneyGuide 3 The Risk for Retirees Spending too much and running out of money when they are still alive Spending too little and leaving a huge amount of money when they die Spending during retirement varies depending on state of health of retiree and an extended illness can quickly exhaust a retiree’s assets 4 Current Retirement Financial Planning Maximize annual spending under an investment strategy Do not incorporate actuarial probabilities of mortality and morbidity Do not capture changes in actual investment performance compared to expected Generally assume a level of ruin, typically 5% 5 Current Retirement Planning Crisis 6 Millions entering retirement every year without a plan Built JourneyGuide to answer two simple questions: How much can I spend in retirement after taxes and inflation? Will I run out of money before I run out of breath? Current Retirement Planning Crisis 7 “[Retirement Income Planning] is a really hard problem. It’s the hardest problem I’ve ever looked at.” – William Sharpe Nobel Laureate in Economics 8 The Good News: We were able to calculate the answer to “how much?” Where we were… Conclusion: Professor Sharpe was right! Too time-consuming to be commercially viable Built an Excel model to determine the spending amount with annual cash flows and the purchase of an annuity The Bad News: Took several hours to iterate over many runs of 1000 simulations each 9 How much can I spend? 10 5000 Monte Carlo simulations on 19 asset classes using Cholesky decomposition Partnership with the Goldenson Center Result: Immensely powerful, commercially viable solution to a pressing problem facing millions of people Built recursive, closed-form algorithm to calculate pre-tax spending given inflation assumptions, pre-retirement savings, capital infusions, Soc Sec, pension, and annuity payments Proprietary tax formula to convert to after-tax spending Reduced calculation time to 0.2 second leveraging Julia 11 Best Interest Analysis 12 Annuity modeling - Demonstrate impact in a dynamic, “living” illustration Where it is taking us… More productive advisors with more AUM and annuity sales Developing index and structured products with a leading investment bank Partnerships with carriers New product design 13 Incorporate Insurance Product Multi-Year Guaranteed Annuities (MYGA)