Retirement Planning: The Volatility-Adjusted Coverage Ratio
21 Pages Posted: 22 Nov 2023
Date Written: October 26, 2023
The important decisions that retirees have to make to try to achieve their financial goals during retirement often stem from models used by financial planners. Despite the important role it plays in many of those models, the failure rate has several limitations and many alternatives have been proposed. This article introduces a new metric, the volatility-adjusted coverage ratio, which incorporates the benefit (the coverage ratio) and the cost (the volatility of the portfolio) of the strategies considered. Application of this new metric is illustrated by determining the optimal asset allocation, for several initial withdrawal rates, for 22 global markets.
Keywords: Retirement planning; coverage ratio; failure rate; volatility; volatility-adjusted coverage ratio
JEL Classification: G11
Suggested Citation: Suggested Citation