Choosing a Retirement Income Strategy: A New Evaluation Framework

14 Pages Posted: 4 Jan 2015

See all articles by Wade D. Pfau

Wade D. Pfau

The American College for Financial Services; Retirement Researcher

Multiple version iconThere are 2 versions of this paper

Date Written: May 1, 2012

Abstract

This 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.

Keywords: retirement planning, retirement income modeling

JEL Classification: C15, D14, G11, G17

Suggested Citation

Pfau, Wade D., Choosing a Retirement Income Strategy: A New Evaluation Framework (May 1, 2012). Available at SSRN: https://ssrn.com/abstract=2544651 or http://dx.doi.org/10.2139/ssrn.2544651

Wade D. Pfau (Contact Author)

The American College for Financial Services ( email )

630 Allendale Rd
King of Prussia, PA 19406
United States

HOME PAGE: http://www.retirementresearcher.com

Retirement Researcher ( email )

1900 Gallows Rd, Suite 350
Vienna, VA 22182
United States

HOME PAGE: http://www.retirementresearcher.com

Do you have negative results from your research you’d like to share?

Paper statistics

Downloads
854
Abstract Views
3,207
Rank
49,637
PlumX Metrics