Sustainable Retirement Income for the Socialite, the Gardener and the Uninsured

22 Pages Posted: 29 May 2007 Last revised: 9 Jan 2011

See all articles by Chris Robinson

Chris Robinson

York University - School of Administrative Studies

Nabil Tahani

York University - Atkinson School of Administrative Studies

Date Written: October 25, 2007

Abstract

This paper advances the literature on the sustainability of retirement income by making consumption a stochastic variable instead of a constant real value, as previous papers have done. The paper continues to make the rate of return and date of death stochastic variables, as Milevsky and Robinson (2000, 2005) do. The sustainability of retirement income depends on the nature of the lifestyle that the retiree chooses. The difference in shortfall probabilities or risk of ruin between the variable cases and the fixed consumption case is significant, and so the planner needs to take this into account. The difference in shortfall probabilities between making consumption a non-constant but deterministic amount, and making it also stochastic, is not as important, because it doesn't reduce risk enough to make more aggressive consumption rates secure. Finally, making consumption correlated with the rate of return, which implies the family adjusts consumption as its wealth changes, reduces shortfall probabilities to a moderate extent. In general, an initial consumption of more than 4% of initial wealth is not sustainable for any likely set of conditions. In the very best case, an initial consumption rate of 6% is sustainable, but we think that case will fit very few people.

Keywords: probability of ruin, stochastic present value, sustainable retirement, stochastic consumption

JEL Classification: D14, D91, G11, C63

Suggested Citation

Robinson, Chris and Tahani, Nabil, Sustainable Retirement Income for the Socialite, the Gardener and the Uninsured (October 25, 2007). Financial Services Review, 2011. Available at SSRN: https://ssrn.com/abstract=989165 or http://dx.doi.org/10.2139/ssrn.989165

Chris Robinson

York University - School of Administrative Studies ( email )

Toronto, Ontario M3J 1P3
Canada

Nabil Tahani (Contact Author)

York University - Atkinson School of Administrative Studies ( email )

4700 Keele Street
Toronto, Ontario M3J 1P3
Canada

HOME PAGE: http://www.yorku.ca/ntahani

Register to save articles to
your library

Register

Paper statistics

Downloads
390
rank
70,868
Abstract Views
2,005
PlumX Metrics