The Case for Flexible Retirement Planning

Abstract

This paper examines the importance of the volatility of investment returns and the uncertainty of remaining lifespan in retirement planning. These factors cause the unnecessary sacrifice of higher withdrawals to reduce the probability of exhausting the retirement portfolio before death (portfolio ruin) if withdrawal rates are constant. Flexible retirement planning, characterized by withdrawal rate adjustments in response to unexpected portfolio performance or changes in expected remaining life, reduces the withdrawal rate sacrifice of probability-of-ruin protection. As Baby Boomers recognize the “preparation gap” consequence from low saving rates and longer expected life spans, flexible retirement planning will prove productive in improving the retirement lifestyle without unduly increasing the probability of ruin.

Keywords: Flexible retirement planning, withdrawal rates

JEL Classification: D9, J26