Should Households Base Asset Decumulation Strategies on Required Minimum Distribution Tables?

26 Pages Posted: 27 Aug 2013

See all articles by Wei Sun

Wei Sun

Renmin University of China - Hanqing Advanced Institute of Economics and Finance and School of Finance

Anthony Webb

Boston College - Center for Retirement Research

Date Written: February 2012

Abstract

Households managing wealth decumulation in retirement must trade off the risk of outliving their wealth against the cost of unnecessarily restricting their consumption. Devising an optimal decumulation plan, reflecting uncertain mortality and asset returns, is well beyond the abilities of most households, who likely rely on rules of thumb. Using numerical optimization, we compare one such rule of thumb – consuming the age-related percentage of remaining wealth specified in the IRS Required Minimum Distribution (RMD) tables – with alternatives and with the theoretical optimal. We show that in models that incorporate uncertain investment returns a decumulation strategy based on the RMD tables performs better than plausible alternatives, such as spending the interest and dividends, consuming a fixed 4 percent of initial wealth, or decumulating over the household’s life expectancy. The RMD tables generally result in too little wealth being consumed at younger ages, and are, therefore, relatively attractive to households with low inter-temporal elasticities of consumption. But all the above strategies fall well short of the theoretical optimum.

Suggested Citation

Sun, Wei and Webb, Anthony, Should Households Base Asset Decumulation Strategies on Required Minimum Distribution Tables? (February 2012). Available at SSRN: https://ssrn.com/abstract=2316852 or http://dx.doi.org/10.2139/ssrn.2316852

Wei Sun (Contact Author)

Renmin University of China - Hanqing Advanced Institute of Economics and Finance and School of Finance ( email )

59 Zhongguancun Street
Beijing, Beijing 100872
China

Anthony Webb

Boston College - Center for Retirement Research ( email )

Fulton Hall 550
Chestnut Hill, MA 02467
United States

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