How Risky is Your Retirement Income Risk Model?

33 Pages Posted: 14 Jan 2015 Last revised: 16 May 2015

Patrick J. Collins

Schultz Collins, Inc.

Huy D. Lam

Schultz Collins, Inc.

Josh Stampfli

Independent

Date Written: May 13, 2015

Abstract

Adequately sustaining lifetime income is a critical portfolio objective for retired investors. This article provides a brief review of various retirement income modeling approaches including historical back testing, Monte Carlo simulations, and other risk modeling techniques. Implausible assumptions underlying risk models may mislead investors concerning the risk and return expectations of their investment strategies. We compare risk models, evaluate their credibility, and demonstrate how overly-simplified models may distort the risks retired investors face. Failure rate differences are stark: 4% at the low end versus 49% at the high end. The article ends with general comments regarding model risk and practitioner investment advice.

Keywords: The 4% rule, Monte Carlo simulation, Portfolio Sustainability, Retirement Income, Risk Modeling

JEL Classification: C15, D31, G11

Suggested Citation

Collins, Patrick J. and Lam, Huy D. and Stampfli, Josh, How Risky is Your Retirement Income Risk Model? (May 13, 2015). Financial Services Review, Forthcoming. Available at SSRN: https://ssrn.com/abstract=2548651 or http://dx.doi.org/10.2139/ssrn.2548651

Patrick J. Collins

Schultz Collins, Inc. ( email )

455 Market St.
Suite #1450
San Francisco, CA 94105
United States

Huy D. Lam (Contact Author)

Schultz Collins, Inc. ( email )

455 Market St.
Suite #1450
San Francisco, CA 94105
United States
415-354-3704 (Phone)
415-291-3015 (Fax)

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

Josh Stampfli

Independent ( email )

No Address Available

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