Optimal and Simple, Nearly Optimal Rules for Minimizing the Probability Of Financial Ruin in Retirement

Moore, Kristen S.; Young, Virginia R.

doi:10.1080/10920277.2006.10597418

Cited by 28 publications

(37 citation statements)

References 19 publications

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“…Then she waits without taking any further action until the next year and rebalances her portfolio given her new estimate for the hazard rate. In the problem of minimizing probability of ruin this discrete rebalancing approximation scheme was shown to be nearly optimal by Moore and Young (2006). A similar analysis needs to be undertaken for the problem of minimizing the occupation time.…”

Section: Extensionmentioning

confidence: 99%

Optimal investment strategy to minimize occupation time

Bayraktar

Young

2008

Ann Oper Res

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Abstract. We find the optimal investment strategy to minimize the expected time that an individual's wealth stays below zero, the so-called occupation time. The individual consumes at a constant rate and invests in a Black-Scholes financial market consisting of one riskless and one risky asset, with the risky asset's price process following a geometric Brownian motion. We also consider an extension of this problem by penalizing the occupation time for the degree to which wealth is negative.

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Section: Extensionmentioning

confidence: 99%

Optimal investment strategy to minimize occupation time

Bayraktar

Young

2008

Ann Oper Res

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“…In this framework, Young (2004) also discusses the distribution of the conditional time of lifetime ruin, given that ruin does occur, and the conditional distribution of bequest, given that ruin does not occur. Therefore, Moore and Young (2006) build on the work of Young (2004) and study the lifetime ruin probability and an optimal asset allocation under general mortality assumptions. As shown for a related problem in , the shape of the force of mortality has a significant impact on optimal investment strategies, which means that the assumption of a constant force of mortality is unrealistic.…”

Section: Literature Overviewmentioning

confidence: 99%

“…In this paper, the author models the time of ruin following an inverse Gaussian distribution. Our approach differs from Young (2004) and Moore and Young (2006) mainly in the fact that we work in a discrete-time setting. Therefore, Moore and Young (2006) build on the work of Young (2004) and study the lifetime ruin probability and an optimal asset allocation under general mortality assumptions.…”

Section: Literature Overviewmentioning

confidence: 99%

Comonotonic approximations for the probability of lifetime ruin

Weert¹,

Dhaene

Goovaerts

2011

Journal of Pension Economics and Finance

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This paper addresses the issue of lifetime ruin, which is defined as running out of money before death. Taking into account the random nature of the remaining lifetime, we discuss how a retiree should invest in order to avoid lifetime ruin. We also discuss the conditional time of lifetime ruin and the notion of bequest or wealth at death.Using analytical approximations based on comonotonicity, we provide a new approach which is easy to understand and leads to very accurate results without computationally complex calculations. Our analytical approach avoids simulation, which allows to solve very general optimal portfolio selection problems.

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“…Finally, when both j=0 (i.e., no liability volatility) and g=0 (no CPI risk), our problem boils down to minimizing the probability of ruin in a complete market, which most recently was examined by Moore and Young (2006). The qualitative interpretation of j=0 is that the retiree's consumption liabilities will not fluctuate in nominal terms, although they can certainly fluctuate in CPI-adjusted terms.…”

Section: The Underlying Modelmentioning

confidence: 99%

Lifetime ruin minimization: should retirees hedge inflation or just worry about it?

Huang

Milevsky²

2011

Journal of Pension Economics and Finance

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Inflation for retirees is different from and mostly higher than the macro-economic (average) inflation rate for the entire population. In the U.S.A, for example, the Consumer Price Index for the Urban population (CPI-U) calculated and reported by the Bureau of Labor Statistics (BLS) has a lesser known cousin called the CPI-E (for the elderly) in which the sub-component weights are based on the consumption patterns of Americans above the age of 62. This suggests that Inflation-Linked Bond Funds (ILBFs) – whose individual component bond adjustments are based on broad population (CPI-U) inflation – might not be the best hedge for individual retirees’ cost of living. But then again, broad shocks to inflation are likely to impact both indices. So, motivated by the question – is it good enough? – the current paper uses lifetime ruin minimization (LRM) techniques to investigate the optimal allocation between an ILBF and a nominal investment fund for a retiree facing an exogenous liability. Our model trades off the benefit of an imperfect hedge against the cost of lower investment growth. However, our numerical results suggest that although ILBFs can be a large part of the optimal retirement portfolio, it should be treated as just another asset class in the broad optimization problem as opposed to a special or unique category.

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Optimal and Simple, Nearly Optimal Rules for Minimizing the Probability Of Financial Ruin in Retirement

Cited by 28 publications

References 19 publications

Optimal investment strategy to minimize occupation time

Optimal investment strategy to minimize occupation time

Comonotonic approximations for the probability of lifetime ruin

Lifetime ruin minimization: should retirees hedge inflation or just worry about it?

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