Combining Stochastic Simulations and Actuarial Withdrawals into One Model

Combining Stochastic Simulations and Actuarial Withdrawals into One Model

Academy of Financial Services, Oct/2016. Journal of Financial Planning November 2016.

Co-author Larry Frank Jr.

Larry R. Frank, Sr., CFP®, is a registered investment adviser and author. He has an MBA from the University of South Dakota and a Bachelor of Science cum laude in physics from the University of Minnesota.

Shawn Brayman, MES, is president and CEO of PlanPlus Inc. in Toronto, Canada. He is the 2007 recipient of the Financial Frontiers Award by the Journal of Financial Planning, the 2011 recipient of the Best Paper Award by the Academy of Financial Services, and the recipient of the Best Applied Research award at the 2016 FPA Annual Conference.

Acknowledgement: The authors wish to thank Joe Tomlinson, an actuary and planner, for insightful comments.

Executive Summary

  • This paper explored a method that combined actuarial approaches for calculating withdrawals in retirement with Monte Carlo simulations. The model recalculated withdrawals for each scenario within each simulation, with a new simulation beginning for each year based on individual capital remaining and adjusted time horizons using mortality tables.
  • The model approach made a direct connection between the various elements making up spending decisions.
  • There were important differences between a simulation that used decision rules to shape income and altered initial withdrawal assumptions, and a model that recast each subsequent year in isolation.
  • The combination of stochastic simulations and period-adjusting actuarial withdrawal techniques proposed here has been termed Continually Adjusting Stochastic Actuarial Model (CASAM).

Read full whitepaper here

I have been using FinaMetrica for over 17 years for onboarding new clients. They like the extensive value of the reports; but what we appreciate is the innovations in technology, the value of the client-facing materials and the development of the life-long client relationships as I get to really know their behavioral tendencies. FinaMetrica has assisted me in building a very successful practice and we highly recommend it for any advisor who wants to enhance the overall value of their client relationships.

Ron Wilkinson - Portland, Oregon, USA
Sign-up for Your SuitabilityPro™ Free Trial
FinaMetrica Profiler Logo
ProPlanner Logo
ProTracker Logo
FinaMetrica Profiler
World-Leading Psychometric Risk Profiling Platform
ProPlanner
Goal-Based Planning
ProTracker
Continuous Suitability Monitoring