1. WDT get's its full nuanced utility (pun intended) from the use of utility math. If, like me, one does not use utility math in daily life, the subtlety and usefulness of WDT can fade a bit. But...
2. Some of the messages that come from WDT analysis and that I have read over the last few weeks are worth being aware of since they are slightly counter intuitive and can have an impact on planning over a full life cycle. Here are a select few:
- It is also important to note, that wealth depletion time is shortened only in the context of higher pension levels. In other words, consumption is not zero but it is equal to pension when wealth gets depleted. Clearly if a retiree does not have any pensions we see that wealth is depleted at the terminal age; on the other hand, for those retirees with high levels of pension income relative to their investible wealth, wealth is depleted much earlier than the terminal age. [Milevsky]
- When [returns are deterministic...and pension income] is held constant, one expects consumption to decline as risk aversion [gamma] rises. However, when returns are stochastic, this phenomenon isn't quite true...we [can] observe consumption rising and later falling with an increase in [gamma], [Milevsky]
- Converting some of the initial investible wealth into a stream of lifetime income increases consumption at all ages even when interest rates are low. [Milevsky]
- it is optimal to exhaust ones financial resources before becoming a centenarian...Stated bluntly, if there is only a 5% chance of reaching the age of 100, it is quite rational to (i.) assume that you won't and (ii.) reduce your consumption to the minimal pension level, if you do. [Milevsky]
- The existence of terminal wealth depletion essentially truncates the time of the life-cycle decision from [max lifetime] to t* [Leung]
- there is no optimal way to consume the endowed wealth if it is too large. [Leung]
- it is possible that none of the solutions for the terminal wealth depletion time is optimal [Leung]
- The first stage is (I was 50 at the time I cooked this up) age 50 to 68 when consumption with kids in the house is high.
- Stage two was 69 to some time T (lets call it 85 or 90) when consumption is lower but in some type of steady equilibrium.
- Stage three was from T to whatever. I figured I would have a very low probability of surviving in that interval and therefore my plan has a bare minimum consumption level baked in which, if necessary, I will hedge out with annuities by converting/re-allocating capital. In addition, even though I have not done that hedge, I have proved to myself that, true to the WDT literature I've read, consumption would rise (could rise up to 12-14%?) now and wealth would be depleted sooner.
4. I am skeptical that WDT in the forms I have seen it, especially the differential equations, has anything significant to say to a typical retiree who would turn away in horror at the sight of the notation...but with some asterisks. One exception might be when some of the intuition of WDT thinking is framed and translated into actionable common sense. Milevsky, in particular, is good at this type of thing. Another exception might be that I think an average retiree, if they were to be dynamited off of fixed horizon planning and converted to survival probability thinking (big if), could extract planning value that would be worth at least as much, and not be all that foreign to, a WDT based approach.
5. The interaction between pensionized income, wealth and its depletion, higher consumption potential, and time is of interest to me and I will continue to monitor the idea of annuitizing some wealth for that reason. On the other hand, I have also been convinced (by Milevsky and my own study) that there is, in fact, some option value to not annuitizing right now. So trade-offs abound and uncertainty is not yet assuaged.
[I'll add more here if I think of something]
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