Optimal control of the decumulation of a retirement portfolio with variable spending and dynamic asset allocation

DOI10.1017/ASB.2021.19MaRDI QIDQ5019044zbMATH OpenOpenAlexFDO

Authors Graham Westmacott, P. A. Forsyth, K. R. Vetzal

Publication date 27 December 2021

Published in ASTIN Bulletin (Search for Journal in Brave)

Full work available at URL https://arxiv.org/abs/2101.02760

zbMATH Keywords

decumulationdefined contribution planfinanceoptimal asset allocationrisk management

Mathematics Subject Classification ID

PDEs in connection with control and optimization (35Q93) Finite difference methods for boundary value problems involving PDEs (65N06) Stability and convergence of numerical methods for boundary value problems involving PDEs (65N12) Actuarial mathematics (91G05)

Abstract: We extend the Annually Recalculated Virtual Annuity (ARVA) spending rule for retirement savings decumulation to include a cap and a floor on withdrawals. With a minimum withdrawal constraint, the ARVA strategy runs the risk of depleting the investment portfolio. We determine the dynamic asset allocation strategy which maximizes a weighted combination of expected total withdrawals (EW) and expected shortfall (ES), defined as the average of the worst five per cent of the outcomes of real terminal wealth. We compare the performance of our dynamic strategy to simpler alternatives which maintain constant asset allocation weights over time accompanied by either our same modified ARVA spending rule or withdrawals that are constant over time in real terms. Tests are carried out using both a parametric model of historical asset returns as well as bootstrap resampling of historical data. Consistent with previous literature that has used different measures of reward and risk than EW and ES, we find that allowing some variability in withdrawals leads to large improvements in efficiency. However, unlike the prior literature, we also demonstrate that further significant enhancements are possible through incorporating a dynamic asset allocation strategy rather than simply keeping asset allocation weights constant throughout retirement.

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Cited in

(9)

• Short term decumulation strategies for underspending retirees
• The 4\% strategy revisited: a pre-commitment mean-variance optimal approach to wealth management
• Efficient post-retirement asset allocation
• Optimal asset allocation for DC pension decumulation with a variable spending rule
• Optimal Asset Allocation for Retirement Saving: Deterministic Vs. Time Consistent Adaptive Strategies
• Optimal performance of a tontine overlay subject to withdrawal constraints
• An optimal withdrawal problem arising from pension fund embedded with income drawdown option
• Risk Measures for Defined Contribution (DC) Pension Plan Decumulation
• Optimal dynamic asset allocation for DC plan accumulation/decumulation: ambition-CVaR

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