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

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