Identification And Control Of Retirement Portfolio Ruin Risk

It is of vital importance for one to have a sustainable pension during the retirement period. Fully understanding of all kinds of retirement portfolio risks and adoption of reasonable risk control measures is a crucial issue for each individual and the society.This paper focuses on retirement ruin risk of the retirement portfolio, conducted risk identification and risk control analysis upon major risk sources of the retirement portfolio during retirement period through both mathematic analytical measure and Monte Carlo simulation from the standpoint of a retired individual. Firstly, the paper introduced the development of pension risk measures, retirement ruin risk, theories and conclusions of foreign and domestic researchers and current situation of pension risk management both home and abroad.Secondly, I inducted and analyzed the analytical model of retirement portfolio ruin risk and identified three major kinds of risk sources, i.e. return and volatility of investment, pension withdrawal rate and median remaining life of retiree through Excel function. And I got the respective sensitivity values of the above four factors through statistical regression, namely -0.0523, 0.0187, 0.0503 and 0.0173. The median remaining life of the retiree is calculated via the statistical demographic data of China in 2005.Thirdly, based on the results of risk identification, I established the model of retiree pension withdrawal and used Monte Carlo method to explore the ways of controlling and reducing retirement ruin risk. Through the analysis of different asset allocation, fixed and flexible withdrawal rate and different retirement age, I concluded that the risk adjusted return and volatility of the assets interact with each other and determine the optimal asset allocation of the retirement portfolio. I also established flexible withdrawal rate model which has a flexible withdrawal rate mechanism based on actual investment performance and set up the up-adjustment and down-adjustment rules of the withdrawal rate. The analysis result indicated that flexible withdrawal rate mechanism can drastically reduce and control retirement ruin risk, reduce average remaining asset multiple and improve the utility of pension asset. Besides, since the analysis results showed that people with older retirement age face less retirement ruin risk, retirees can choose different retirement age to defend the retirement ruin risk caused by longevity risk.Finally, I summarized current situation of investment products for pension risk management in China, I suggested that the individual can buy products such as life cycle fund, variable income annuity and plan the consumption level of pension in advance to control retirement ruin risk. This paper adopts mathematic analytical measure and Monte Carlo method simultaneously to analyze the retirement ruin risk of pension portfolio, provides optimal asset allocation of pension portfolio and also different ways to control and reduce retirement ruin risk. Meanwhile, the paper can be used as the theoretical foundation for investment risk education regarding the retirees.