Retirement Planning: Is One Number Enough?

Abstract

Academics, practitioners, and investors at large typically have a preference for making decisions based on a single variable that is supposed to be maximized or minimized. This approach is usually appropriate but it may also be misleading. When selecting an optimal retirement strategy a retiree may aim to maximize the coverage ratio, a novel metric superior to the failure rate. This article suggests to focus on the whole distribution of coverage ratios instead, or at least on some percentiles that may be of particular interest to a retiree. Although such an approach may not be as neat as making decisions based on optimizing a single variable, it does enable the consideration of the relevant trade-offs a retiree needs to evaluate in order to find an ideal retirement strategy.

Keywords: retirement planning; coverage ratio; failure rate

JEL Classification: G11