2021/01/07 by Peter Forsyth, Forsyth, Peter A., Kenneth R. Vetzal +3
Business, Management and Accounting · Health Professions · Social Sciences · #35Q93 #65N06 #65N12 #91G #Computational Finance (q-fin.CP) #FOS: Economics and business #Financial Literacy, Pension, Retirement Analysis #Global Health Care Issues #Insurance, Mortality, Demography, Risk Management #Portfolio Management (q-fin.PM) #Risk Management (q-fin.RM)
paper · pdf · doi:10.48550/arxiv.2101.02760
openalex publication_date 2021/01/07 · openalex created_date 2022/07/25 · openalex updated_date 2026/07/28
We extend the Annually Recalculated Virtual Annuity (ARVA) spending rule for\nretirement savings decumulation to include a cap and a floor on withdrawals.\nWith a minimum withdrawal constraint, the ARVA strategy runs the risk of\ndepleting the investment portfolio. We determine the dynamic asset allocation\nstrategy which maximizes a weighted combination of expected total withdrawals\n(EW) and expected shortfall (ES), defined as the average of the worst five per\ncent of the outcomes of real terminal wealth. We compare the performance of our\ndynamic strategy to simpler alternatives which maintain constant asset\nallocation weights over time accompanied by either our same modified ARVA\nspending rule or withdrawals that are constant over time in real terms. Tests\nare carried out using both a parametric model of historical asset returns as\nwell as bootstrap resampling of historical data. Consistent with previous\nliterature that has used different measures of reward and risk than EW and ES,\nwe find that allowing some variability in withdrawals leads to large\nimprovements in efficiency. However, unlike the prior literature, we also\ndemonstrate that further significant enhancements are possible through\nincorporating a dynamic asset allocation strategy rather than simply keeping\nasset allocation weights constant throughout retirement.\n