Choosing a retirement income strategy: a new evaluation framework
AbstractThis article presents the initial stages of a new evaluation framework for choosing among retirement income strategies. The investigation includes eight retirement income strategies: constant inflation-adjusted withdrawal amounts, a constant withdrawal percentage of remaining assets, a withdrawal percentage based on remaining life expectancy, a more aggressive hybrid withdrawal percentage, inflation-adjusted and fixed single premium immediate annuities, a variable annuity with a guaranteed living withdrawal benefit rider, and a strategy which annuitizes the flooring level to meet basic needs and uses the hybrid withdrawal percentage for remaining assets. These eight strategies will be analyzed with six retirement outcome measures over a 30-year retirement period: the average amount whereby spending falls below the minimally acceptable level, the average spending amount, the remaining bequest at the end of the retirement period, the minimum spending amount for any year in the retirement period, a measure of whether spending increases or decreases over time defined as spending in the first year divided by spending in the 30th year, and the value of total spending after accounting for diminishing returns from increased spending for a client with somewhat inflexible spending needs. The model is applied to three client scenarios representing a cross-section of RIIA’s client segmentation matrix. It is built using Monte Carlo simulations which reflect current market conditions, so that systematic withdrawals and guaranteed products share compatible underlying assumptions.
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Bibliographic InfoPaper provided by University Library of Munich, Germany in its series MPRA Paper with number 39169.
Date of creation: 01 Jun 2012
Date of revision:
retirement planning; retirement income modeling;
Find related papers by JEL classification:
- G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
- C15 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Statistical Simulation Methods: General
- D14 - Microeconomics - - Household Behavior - - - Household Saving; Personal Finance
This paper has been announced in the following NEP Reports:
- NEP-AGE-2012-06-13 (Economics of Ageing)
- NEP-ALL-2012-06-13 (All new papers)
- NEP-CMP-2012-06-13 (Computational Economics)
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Blog mentionsAs found by EconAcademics.org, the blog aggregator for Economics research:
- Choosing a Retirement Income Strategy: A New Evaluation Framework
by Wade Pfau in Pensions, Retirement Planning, and Economics Blog on 2012-06-03 12:28:00
- Making Better Presentations with Powerpoint
by Wade Pfau in Pensions, Retirement Planning, and Economics Blog on 2012-07-04 01:52:00
- Video Interview: Choosing a Retirement Income Strategy
by Wade Pfau in Pensions, Retirement Planning, and Economics Blog on 2012-11-13 02:24:00
- You Can't Control When You're Born... Revisiting Sequence of Returns Risk
by Wade Pfau in Pensions, Retirement Planning, and Economics Blog on 2013-09-20 16:23:00
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