Toward Determining the Optimal Investment Strategy for Retirement

Investors who are about to retire are first and foremost concerned with supporting their spending needs throughout retirement. But they also derive satisfaction from growing their wealth beyond what is needed to support consumption in order to leave a bequest to their heirs or chosen charities. The...

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Published inThe journal of retirement Vol. 7; no. 1; pp. 35 - 42
Main Authors Estrada, Javier, Kritzman, Mark
Format Journal Article
LanguageEnglish
Published London Pageant Media 31.07.2019
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Abstract Investors who are about to retire are first and foremost concerned with supporting their spending needs throughout retirement. But they also derive satisfaction from growing their wealth beyond what is needed to support consumption in order to leave a bequest to their heirs or chosen charities. The predominant metric for evaluating retirement investment strategies is the failure rate. However, it doesn’t distinguish between strategies that fail early in retirement from those that fail near the end of retirement, and it doesn’t account for potential bequests. To overcome these shortcomings the authors propose a new metric, the coverage ratio, which is more comprehensive and informative than the failure rate. In addition, they propose a utility function to evaluate the coverage ratio, which penalizes shortfalls more than it rewards surpluses. Finally, the authors use their proposed framework to determine the optimal allocation to stocks and bonds using historical and simulated returns. TOPICS: Retirement, quantitative methods, portfolio construction
AbstractList Investors who are about to retire are first and foremost concerned with supporting their spending needs throughout retirement. But they also derive satisfaction from growing their wealth beyond what is needed to support consumption in order to leave a bequest to their heirs or chosen charities. The predominant metric for evaluating retirement investment strategies is the failure rate. However, it doesn’t distinguish between strategies that fail early in retirement from those that fail near the end of retirement, and it doesn’t account for potential bequests. To overcome these shortcomings the authors propose a new metric, the coverage ratio, which is more comprehensive and informative than the failure rate. In addition, they propose a utility function to evaluate the coverage ratio, which penalizes shortfalls more than it rewards surpluses. Finally, the authors use their proposed framework to determine the optimal allocation to stocks and bonds using historical and simulated returns. TOPICS: Retirement, quantitative methods, portfolio construction
Author Estrada, Javier
Kritzman, Mark
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SubjectTerms Advisors
Asset allocation
Economic models
Expected utility
Failure
Government bonds
Investment policy
Investments
Investors
Retirement
Stocks
Success
Utility functions
Title Toward Determining the Optimal Investment Strategy for Retirement
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Volume 7
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