Managing to Target (II): Dynamic Adjustments for Retirement Strategies

16 Pages Posted: 12 Sep 2019

Date Written: September 4, 2019

Abstract

All individuals need to determine a withdrawal policy for their retirement. This decision needs to balance the goal of funding a desired lifestyle (and perhaps leaving a bequest) with the goal of not running out of money too early, which is best done by making a financial plan. When the returns of his portfolio differ from those expected in the plan, what should a retiree do? Should he statically stick to the withdrawals specified in his plan? Should he introduce dynamic adjustments in order to push the portfolio closer to the path outlined in the plan instead? This article evaluates two types of dynamic policies, broadly referred to as ‘managing to target’ (M2T) strategies, that adjust either the periodic withdrawals or the portfolio’s asset allocation. The results reported show that dynamic M2T strategies outperform a static strategy of sticking to the plan, and that adjusting withdrawals is superior to adjusting the portfolio’s asset allocation.

Keywords: Retirement planning; failure rate; coverage ratio

JEL Classification: G11

Suggested Citation

Estrada, Javier, Managing to Target (II): Dynamic Adjustments for Retirement Strategies (September 4, 2019). Available at SSRN: https://ssrn.com/abstract=3448056 or http://dx.doi.org/10.2139/ssrn.3448056

Javier Estrada (Contact Author)

IESE Business School ( email )

IESE Business School
Av. Pearson 21
Barcelona, 08034
Spain
+34 93 253 4200 (Phone)
+34 93 253 4343 (Fax)

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