Dynamic Retirement Withdrawal Planning

Abstract

This paper develops a dynamic model of retirement withdrawal planning that allows retirees and financial planners to improve the probability of retirement portfolio success while simultaneously increasing the average withdrawal rate. The key elements of the model are periodic adjustments of retirement withdrawal rates based on both portfolio performance and remaining life expectancy, and Monte Carlo simulation of both investment returns and mortality. The inclusion of mortality in fixed planning horizon models reduces the probability of retirement-portfolio ruin by almost 50%. When compared to fixed withdrawal rate models, dynamic withdrawal management incorporating mortality reduces the probability of ruin by another 35-40% while increasing average lifetime withdrawal rates by nearly 50%.

Keywords: Retirement portfolio, Adjustable withdrawal rates, Monte Carlo simulation

JEL Classification: G1, G2