| Individual's and couple's entering retirement face an uncertain future. They have to decide how to manage their savings so that they live the fullest life possible from a financial standpoint, while minimizing the risk of outliving their money. To get the best financial growth, retirees should invest their savings in a portfolio consisting of equity and fixed income securities. We use dynamic programming to maximize annual portfolio withdrawals dependent on mortality tables and stochastic models for stock and bond returns. We call our approach the Dynamic Forecasting (DF) approach because it assumes that the retiree's portfolio will repeat its past performances in the future. Two variations on the DF approach are the relaxed DF approach and the alternate DF approach. These provide two opposite withdrawal structures while guaranteeing a 0% probability of failure. Our strategy is compared with the Constant Dollar (CD) approach and the Endowment approach, also known as the Constant Percentage approach (CP), using the Withdrawal Efficiency Rate (WER) metric. The strategies are compared under increasing, decreasing, and constant equity glide paths. The DF and alternate DF approaches outperform the other strategies under the WER metric and are the only strategies evaluated that a probability of failure of zero and are guaranteed to not leave money unspent at the end of the retirement period. |
