Optimal Asset Allocation for DC Pension Decumulation with a Variable Spending Rule

Vetzal, Kenneth R.; Westmacott, Graham

doi:10.2139/ssrn.3494501

Cited by 3 publications

(6 citation statements)

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“…Forsyth et al (2020) use the same measure of reward but minimize the downside variability of withdrawals for an ARVA-type spending rule, that is the risk measure is downward withdrawal variability. There are some other noteworthy differences between this work and that of Forsyth et al (2020). First, we impose upper and lower bounds on annual withdrawals.…”

Section: Discussionmentioning

confidence: 99%

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Optimal Control of the Decumulation of a Retirement Portfolio With Variable Spending and Dynamic Asset Allocation

Vetzal¹,

Westmacott²

2021

ASTIN Bull.

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We extend the Annually Recalculated Virtual Annuity (ARVA) spending rule for retirement savings decumulation (Waring and Siegel (2015) Financial Analysts Journal, 71(1), 91–107) 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 5% 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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Section: Discussionmentioning

confidence: 99%

“…In this work, we will compute Equation (2.3) based on the CPM 2014 mortality tables (male) from the Canadian Institute of Actuaries 6 to compute T * x (t) with x = 65. Further discussion of the ARVA spending rule can be found in Forsyth et al (2020).…”

Section: Arva Spending Rulementioning

confidence: 99%

Optimal Control of the Decumulation of a Retirement Portfolio With Variable Spending and Dynamic Asset Allocation

Vetzal¹,

Westmacott²

2021

ASTIN Bull.

Self Cite

View full text Add to dashboard Cite

show abstract

“…In this work, we will compute equation (2.3) based on the CPM 2014 mortality tables (male) from the Canadian Institute of Actuaries 4 to compute T * x (t) with x = 65. Further discussion of the ARVA spending rule can be found in Forsyth et al (2020).…”

Section: Arva Spending Rulementioning

confidence: 99%

“…the risk measure is downward withdrawal variability. There are some other noteworthy differences between this work and that ofForsyth et al (2020). First, we impose upper and lower bounds on annual withdrawals.…”

mentioning

confidence: 98%

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

Forsyth¹,

Vetzal²,

Westmacott³

2021

Preprint

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We extend the Annually Recalculated Virtual Annuity (ARVA) spending rule for retirement savings decumulation (Waring and Siegel, 2015) 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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A Stochastic Control Approach to Defined Contribution Plan Decumulation: "The Nastiest, Hardest Problem in Finance"

Forsyth¹

2020

Preprint

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We pose the decumulation strategy for a Defined Contribution (DC) pension plan as a problem in optimal stochastic control. The controls are the withdrawal amounts and the asset allocation strategy. We impose maximum and minimum constraints on the withdrawal amounts, and impose no-shorting no-leverage constraints on the asset allocation strategy. Our objective function measures reward as the expected total withdrawals over the decumulation horizon, and risk is measured by Expected Shortfall (ES) at the end of the decumulation period. We solve the stochastic control problem numerically, based on a parametric model of market stochastic processes. We find that, compared to a fixed constant withdrawal strategy, with minimum withdrawal set to the constant withdrawal amount, the optimal strategy has a significantly higher expected average withdrawal, at the cost of a very small increase in ES risk. Tests on bootstrapped resampled historical market data indicate that this strategy is robust to parametric model misspecification.

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Optimal Asset Allocation for DC Pension Decumulation with a Variable Spending Rule

Cited by 3 publications

References 0 publications

Optimal Control of the Decumulation of a Retirement Portfolio With Variable Spending and Dynamic Asset Allocation

Optimal Control of the Decumulation of a Retirement Portfolio With Variable Spending and Dynamic Asset Allocation

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

A Stochastic Control Approach to Defined Contribution Plan Decumulation: "The Nastiest, Hardest Problem in Finance"

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