Income Sustainability in Retirement: <i>A Case Study of the Life-Cycle Account</i>

Kintzel, Dale

doi:10.3905/jor.2019.1.059

JOR

2019

DOI: 10.3905/jor.2019.1.059

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Income Sustainability in Retirement: A Case Study of the Life-Cycle Account

Dale Kintzel¹

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2020

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Measuring Sequence of Returns Risk

Clare¹,

Glover²,

Seaton³

et al. 2020

JOR

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We discuss the nature and importance of the concept of Sequence Risk, the risk that a bad return occurs at a particularly unfortunate time, such as around the point of maximum accumulation or the start of decumulation. This is especially relevant in the context of retirement savings, where the implications for withdrawal rates of a bad return can be particularly severe. We show how the popular 'glidepath' or target date savings' products are very exposed to such risk. Three different measures of Sequence Risk are proposed, each of which is intended to inform investors of the probability that a chosen investment strategy may not deliver desired withdrawal rates and hence these measures are intended to aid investment choices; conventional performance measures such as Sharpe or Sortino ratios are only indirectly related to this ability to achieve a given withdrawal experience. Finally, we note that, using US data, very simple portfolios comprising equities and bonds can achieve very low probabilities of failure to achieve popular desired withdrawal rates such as 5% p.a. providing the equity component is 'smoothed' by switching in and out of cash using a simple trend following rule.

show abstract

Measuring Sequence of Returns Risk

Clare¹,

Glover²,

Seaton³

et al. 2020

JOR

View full text Add to dashboard Cite

show abstract

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Income Sustainability in Retirement: A Case Study of the Life-Cycle Account

Cited by 1 publication

References 7 publications

Measuring Sequence of Returns Risk

Measuring Sequence of Returns Risk

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