3433-vol. 6 issue 2-3.pmd - iarfc

Volume 6, Issue 2 & 3 73
The user can quickly page back up to the start date and run the
retirement strategy over other time periods and easily see the results in
Worksheet 2 and the charts. Example’s strategy does better over some other
periods such as 1928-68 and 1950-90. In these periods, the stock dominated
portfolio grows to over $1 million in early retirement and can support LTC
costs or a much higher target income. In the 1965-2005 period, the stock
portfolio runs out of funds at the end. Then the user can build another longterm
financial retirement strategy (e.g, starts retirement later or saves more)
and run that strategy over similar time periods.
Discussion and Conclusions
The major benefits of the HRPM model based on actual yearly
historical returns stems from its ability to run different long-term financial
retirement strategies over different historical periods and allow the user to
experience the year-by-year “bumps” in the road. This provides a basis for
forming impressions (subjective probability distributions) about ranges of
possible outcomes for different strategies. Traditional projector models based
on long-run average or geometric mean returns may give quicker, easier-to-use
estimates of savings needed for different portfolio strategies. However,
individuals save for and retire during specific periods that experience widely
different returns and resulting portfolio values. Simulation type models may
pick up some of this risk by using low and high returns for various portfolios
over different time periods. Nevertheless, even those simulations do not
show the year-by-year changes in assets (van Welie, Janssen & Hoogstrate,
2004). Thus, they may miss the timing of major events which can change
long-run portfolio values, resulting retirement income, and even retirement
strategies such as target income, time of retiring, and portfolio mixes.
The enhancements in the present version of the Historical Retirement
Income Projector Model (HRIPM) should help make the model accessible and
usable for a wider audience. The shift to Excel makes the program readily
accessible to virtually all users with basic computer spreadsheet skills
(updated model available free of charge from authors, see Footnote 1). Also,
the new charts of retirement assets and income make the output easier to
visualize and provide more information on short-term risks of asset volatility.
The addition of long-term care, medical, and other costs expands the retirement
income projections over a wider range of risks. Thus, financial educators,
professional advisors, and individuals should find the model useful for
illustrating some of the investing principles and pitfalls of various long-run
portfolio strategies such as stocks for the long-run (Siegel, 2002) based on
modern portfolio theory (Markowitz, 1954; Sharpe, 1964) versus more conservative
portfolios (e.g., Shiller, 2005).
Research & Theory