Optimal and Simple, Nearly-Optimal Rules for Minimizing the Probability of Financial Ruin in Retirement
نویسندگان
چکیده
The increasing risk of poverty in retirement has been well-documented; it is projected that current and future retirees’ living expenses will significantly exceed their savings and income. In this paper, we consider a retiree who does not have sufficient wealth and income to fund her future expenses and we seek the asset allocation that minimizes the probability of financial ruin during her lifetime. Building on the work of Young (2004) and Milevsky, Moore and Young (2005), under general mortality assumptions, we derive a variational inequality that governs the ruin probability and optimal asset allocation. We explore the qualitative properties of the ruin probability and optimal strategy, present a numerical method for their estimation, and examine their sensitivity to changes in model parameters for specific examples. We then present an easy-to-implement allocation rule and demonstrate via simulation that it yields nearly-optimal ruin probability, even under discrete portfolio rebalancing. JEL Classification: J26; G11
منابع مشابه
Minimizing the Probability of Ruin in Retirement
Retirees who exhaust their savings while still alive are said to experience financial ruin. The savings are typically grown during life’s accumulation phase then spent during the retirement decumulation phase. Extensive research into invest-and-harvest decumulation strategies has been conducted, but recommendations differ markedly. This has likely been a source of concern and confusion for the ...
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