What are the Three Paradigms of Retirement Income Planning?

Abstract

There exists a semi-hidden and little researched connection between planning and software programming that supports that planning, as well as little research into the connection to planning and programming related to the paradigm that exists underlying those connections. This paper discusses the paradigms of retirement income planning from past, to present, and observations to advance the planning profession and research into the future. The profession, researchers, and software programmers have transitioned from the first to the second paradigm and has yet to visualize the third paradigm to make that paradigm shift. Retirees continue to age year by year, but each cohort has a different distribution period due to the ever-decreasing time remaining in longevity tables as they age. There is not a universal retiree (as implied by current research using a single distribution time period with a single allocation; or at best two or three time periods and allocations). Instead, there exist many retirees with many different allocations and many remaining distributions time periods. Thus, one rule of thumb approach e.g., the 4% rule (or any drawdown rate) with inflation applied thereafter, or one Monte Carlo simulation, can't apply to all allocations plus all time periods at the same time because of those different ages with correlating shorter or longer remaining longevity for income drawdown. Therefore, research to date has been narrowly focused, which unintentionally leads to a narrowly applied approach for practitioners as well. Frank 2022a introduced how to model retiree drawdowns through a method that applies to any retiree at any age and subsequently over each retiree's remaining lifetime by cohort ages.