Life is Non-Linear: Structuring Retirement Portfolios for the Long Haul

23rd Annual Meeting of the Academy of Financial Services, Anaheim, CA, October 9-10, 2009

13 Pages Posted: 29 Sep 2009

Date Written: September 29, 2009

Abstract

The financial crisis of 2008 cut deeply into the retirement savings of most retirees and those who are soon to retire. Add to this the clear trends of longer life expectancies and more active retirements and it becomes clear that portfolios must be structured to minimize the risk of asset depletion during a long retirement. Using Monte Carlo simulations to account for market uncertainties, we analyze six common retirement portfolio strategies in terms of their longevity and income generation over a retiree's expected lifetime. We find the traditional, defensive portfolio delivers suboptimal returns; furthermore, they are usually based on linear cash-flow needs that we think are unrealistic.

Behavioral measures, such as delayed retirement or reduced consumption during retirement, also do little to extend the portfolio's longevity. We think retirement portfolios that include annuities, or employ a core of safe investments and a portion of assets allocated to more growth-oriented investments, may increase the retiree's income while reducing the risk of asset depletion during retirement.

Keywords: Retirement portfolios, Monte Carlo simulation, portfolio longevity

JEL Classification: D11, D91, G11

Suggested Citation

Klement, Joachim, Life is Non-Linear: Structuring Retirement Portfolios for the Long Haul (September 29, 2009). 23rd Annual Meeting of the Academy of Financial Services, Anaheim, CA, October 9-10, 2009. Available at SSRN: https://ssrn.com/abstract=1480124 or http://dx.doi.org/10.2139/ssrn.1480124

Joachim Klement (Contact Author)

Fidante Partners ( email )

1 Tudor Street
London, EC4Y 0AH
United Kingdom
02078320956 (Phone)

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