Sequence Risk: Managing Retiree Exposure to Sequence Risk Through Probability of Failure Based Decision Rules

Abstract

• This paper broadens the perspective on sustainable distributions by expanding into three dimensions, introducing transitory states as well as all those states existing simultaneously.

• Withdrawal rates alone do not tell a complete sustainable distribution story; withdrawal rates are time dependent.

• The Probability of Failure (POF), a time independent variable, is more useful for true comparison of withdrawal rates over any time period or asset allocation.

• Comparison of POF surfaces, and their shift between strategies, illustrates how effective one strategy is as compared to another.

• The methodology presented provides an ability to evaluate sustainable withdrawal rates and exposure to sequence risk together.

Keywords: Retirement Planning, Adjustable Withdrawal Rates, Sequence Risk, Probability of Failure

JEL Classification: D14, D81, D90, G11, G17