Combining Flexible Asset Allocation, Sustainable Withdrawals, and Deferred Annuities to provide an Adaptive Lifelong Investing Solution
By Anran Chen, Steven Haberman, Steve Thomas
In this paper, we integrate investment decisions in the post-retirement decumulation period with that of the deferred annuity purchase to provide a lifetime decumulation solution. Based on Monte Carlo simulation and historical experience, we use the Perfect Withdrawal Rate (PWR) as a tool to make recommendations on withdrawal rates and asset allocations for different levels of risk preferences. We have a few potentially important findings. First, we illustrate how cheap it is to use a deferred annuity (especially with a deferred period of more than 15 years) as a solution to deal with longevity risk and maintain control of retirement wealth with the investor. Second, we find that if an individual wants to maximise median PWR, he/she should allocate almost 100% in stocks regardless of the length of chosen decumulation period. If an individual wants to maximise minimum PWR, he/she should allocate around 40% – 60% in stocks; therefore, a substantial stocks component should be maintained even if the individual is very risk averse. This then links to our final conclusion on a re-defined Glidepath: if an individual can accept a lower than 50% risk of failure, he/she should move from stocks to bonds as he/she becomes older; however a certain percentage in stocks should be maintained through the decumulation phase.
Source: SSRN
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