A Modified Life Expectancy Approach to Withdrawal Rate Management

Abstract

This research explores the costs and benefits of modifying life expectancy (planning horizon) within a multiple-factor withdrawal management strategy. Stochastic optimization of Monte Carlo simulation analysis using data from 1926-2009 is employed within a seven-factor control limit model. This research contributes to the literature by modifying the planning horizon to avoid excessive withdrawals by those retirees most vulnerable to ruin.

Previous research has found that many of the portfolio failures occur in the final years of life. A more conservative approach to the final years potentially protects those retirees with the worst portfolio performance. This modification of the retirement planning model allows the majority of retirees to adopt more aggressive withdrawal rate strategies earlier in their retirement.

This model improves upon previous research by enhancing the median lifetime average withdrawal rate while maintaining less than a .1% probability of ruin. The efficacy of expected longevity modification is demonstrated for new retirees aged 55 to 75.

Keywords: Retirement Planning, Withdrawals, Monte Carlo

JEL Classification: D14, D90, E17. G11, J26