How to Spend and Invest Retirement Savings

The question of post-retirement optimal consumption and investment of retirement savings is addressed. This problem has received considerably less attention than that of how to invest for retirement. With the increase in life span and an increase in private pension funds, a retiree has considerable flexibility in both how to consume and how to continue to invest their retirement funds. Our interest is in developing a platform that allows a wide variety of behavioural aspects to be modeled and also enables explicit constraints to be imposed. To enable the flexibility we seek it is necessary to model the problem as a large-scale nonlinearly constrained optimization problem, which is solved using a sequential quadratic programming algorithm. Fortunately, modern optimization methods are now sufficiently powerful as to enable solving such problems. A key point is that, though the problems are large, they have a rich structure. Problems in this class have been addressed assuming that an investor is rational in the sense that when making financial decisions the preference relation of the investor satisfies all ∗Work supported by the National Science Foundation grant CCR-9988205 and Office of Naval Research grant N00014-96-1-0274