COMMERCIAL AND INDUSTRIAL MATHEMATICS

July 22, 2014
THE FIELDS INSTITUTE FOR RESEARCH IN MATHEMATICAL SCIENCES
20th ANNIVERSARY YEAR

November 22, 2012

2012 Annual IFID Centre Conference
Theme: Withdrawing Money from your Nest Egg
8:30 a.m.-12:30 p.m.
Fields Institute,
222 College St., Toronto

Confirmed Speakers:

Wade D. Pfau, Ph.D., CFA
Director, Macroeconomic Policy Program, Associate Professor, Economics
National Graduate Institute for Policy Studies (GRIPS)
An efficient frontier for retirement income

This article outlines an approach for building a retirement income strategy, which moves dramatically away from the financial planner concepts of safe withdrawal rates and failure rates. The focus is how to best meet two competing financial objectives for retirement: satisfying spending goals and preserving financial assets. The process described here focuses on Moshe Milevsky's production allocation of assets between a portfolio of stocks and bonds, inflation-adjusted and fixed single-premium immediate annuities (SPIAs), and immediate variable annuities with guaranteed living benefit riders (VA/GLWBs). This process incorporates unique client circumstances, bases asset return assumptions on current market conditions, uses a consistent fee structure for a fair comparison between income tools, operationalizes the concept of diminishing returns from spending by incorporating a minimum needs threshold and a lifestyle spending goal, uses survival probabilities to calculate outcomes, and incorporates retiree preferences to balance the competing financial objectives for the final choice among the collection of allocations that define the efficient frontier for retirement income.


Marie-Eve Lachance, Ph.D.
Associate Professor, Finance, San Diego State University
Roth versus traditional accounts in a life-cycle model with tax risk

When saving for retirement, individuals can choose between front-loaded accounts with tax-deductible contributions and back-loaded accounts without them. Canadian front-loaded RRSPs and back-loaded TFSAs correspond to U.S. traditional and Roth accounts. This presentation compares front- and back-loaded retirement accounts by introducing them in a standard life-cycle model. It discusses how to address the technical challenges encountered when modeling the realistic tax treatment associated with these accounts. It highlights that withdrawals from front-loaded accounts can trigger additional taxes (repayment of OAS benefits in Canada, taxation of Social Security benefits in the U.S.), which weakens their relative appeal. Last, tax risk is added to the model to evaluate the risk reduction benefits of tax diversification strategies that combine the two types of accounts.


Thomas Salisbury, Ph.D.
Professor, Mathematics and Statistics, York University
Optimizing variable annuity income

Recently, many variable annuity providers have restricted new sales of products with guaranteed lifetime withdrawals. Despite this, a very large pool of existing contract holders face decisions about how much income to draw from their existing products, and when to draw it. I will discuss this question from a control theory / American options point of view. (Joint work with Huaxiong Huang and Moshe A. Milevsky.)


Anthony Webb, Ph.D.
Economist, Center for Retirement Research, Boston College
Should households base asset decumulation strategies on required minimum distribution tables?

Households managing wealth decumulation in retirement must trade off the risk of outliving their wealth against the cost of unnecessarily restricting their consumption. Devising an optimal decumulation plan, reflecting uncertain mortality and asset returns, is well beyond the abilities of most households, who likely rely on rules of thumb. Using numerical optimization, we compare one such rule of thumb - consuming the age-related percentage of remaining wealth specified in the IRS Required Minimum Distribution (RMD) tables – with alternatives and with the theoretical optimal. We show that in models that incorporate uncertain investment returns a decumulation strategy based on the RMD tables performs better than plausible alternatives, such as spending the interest and dividends, consuming a fixed 4 percent of initial wealth, or decumulating over the household’s life expectancy. The RMD tables generally result in too little wealth being consumed at younger ages, and are, therefore, relatively attractive to households with low intertemporal elasticities of consumption. But all the above strategies fall well short of the theoretical optimum.

Program

8:00 am
Registration, Breakfast/Coffee

8:25 am
Welcome, Edward Bierstone
, Director, Fields Institute

8:30- 9:20 am
Wade Pfau

Director, Macroeconomic Policy Program; Associate Professor, Economics, National Graduate Institute for Policy Studies (GRIPS)
An efficient frontier for retirement income

9:20-10:05 am
Anthony Webb
Economist, Center for Retirement Research, Boston College
Should households base asset decumulation strategies on required minimum distribution tables?

10:10-10:30 am
break

10:30-11:15 am
Marie-Eve Lachance
Associate Professor, Finance, San Diego State University
Roth versus traditional accounts in a life-cycle model with tax risk

11:20-12:05 pm
Thomas Salisbury
Professor, Mathematics and Statistics, York University
Optimizing variable annuity income

12:15pm
Networking Lunch

 

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