Combining Flexible Asset Allocation, Sustainable Withdrawals, and Deferred Annuities to provide an Adaptive Lifelong Investing Solution

44 Pages Posted: 22 Apr 2021

See all articles by Anran Chen

Anran Chen

Redington

Steven Haberman

City University London - Faculty of Actuarial Science

Steve Thomas

City University London - Sir John Cass Business School

Date Written: April 21, 2021

Abstract

In this paper, we integrate investment decisions in the post-retirement decumulation period with that of the deferred annuity purchase to provide a lifetime decumulation solution. Based on Monte Carlo simulation and historical experience, we use the Perfect Withdrawal Rate (PWR) as a tool to make recommendations on withdrawal rates and asset allocations for different levels of risk preferences. We have a few potentially important findings. First, we illustrate how cheap it is to use a deferred annuity (especially with a deferred period of more than 15 years) as a solution to deal with longevity risk and maintain control of retirement wealth with the investor. Second, we find that if an individual wants to maximise median PWR, he/she should allocate almost 100% in stocks regardless of the length of chosen decumulation period. If an individual wants to maximise minimum PWR, he/she should allocate around 40% - 60% in stocks; therefore, a substantial stocks component should be maintained even if the individual is very risk averse. This then links to our final conclusion on a re-defined Glidepath: if an individual can accept a lower than 50% risk of failure, he/she should move from stocks to bonds as he/she becomes older; however a certain percentage in stocks should be maintained through the decumulation phase.

Keywords: Deferred Annuities, Post-retirement Decumulation, Perfect Withdrawal Rates, Adaptive Investment solution, Glidepath

JEL Classification: G11, G22

Suggested Citation

Chen, Anran and Haberman, Steven and Thomas, Stephen H., Combining Flexible Asset Allocation, Sustainable Withdrawals, and Deferred Annuities to provide an Adaptive Lifelong Investing Solution (April 21, 2021). Available at SSRN: https://ssrn.com/abstract=3831244 or http://dx.doi.org/10.2139/ssrn.3831244

Anran Chen (Contact Author)

Redington ( email )

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1 Angel Ct
London, EC2R 7HJ
United Kingdom

Steven Haberman

City University London - Faculty of Actuarial Science ( email )

London
United Kingdom

Stephen H. Thomas

City University London - Sir John Cass Business School ( email )

106 Bunhill Row
London, EC1Y 8TZ
United Kingdom
+44 (0) 20 7040 5271 (Phone)
+44 (0) 20 7040 8881 (Fax)

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