Research and Reality: A Literature Review on Drawing Down Retirement Financial Savings

Abstract

How do, could, and should retirees draw down their financial savings? This article reviews over 100 papers on this topic from the perspective of individuals, families, governments, and financial institutions. Three significant conceptual/methodological weaknesses in the existing literature are identified: (1) analysts have examined a limited range of self-managed drawdown strategies; (2) nearly all have ignored home ownership, pensions, debt, and government taxes and transfers when quantitatively evaluating alternative drawdown strategies; and (3) there is a well-acknowledged gap between the behavior implied by economic models and that of real-life individuals, particularly when it comes to voluntary annuitization. Expanding the set of drawdown strategies evaluated (e.g., including larger payouts when life expectancy is reduced after the onset of a significant health condition, or using savings as bridge income to delay the take-up of Social Security payments), refining the income concept used, and more exact modeling of the trade-offs underlying individual decision-making will likely increase the appeal of self-managed drawdown strategies and help resolve the "annuity puzzle" that has long dominated this line of research. It may also lead to advice and financial products that will better meet the needs of retirees.

The primacy of ethics in the provision of financial advice

“…As the assets of the Australian financial sector have grown at more than twice the rate of the economy over the past three decades, the exposure of individuals to financial risks has increased. Vulnerability to financial risks has been aggravated by the reduction in defined benefit superannuation schemes and is exacerbated by the complexity of the financial services landscape (Gallery et al ., 2011; MacDonald et al ., 2013). This complexity includes an array of choices involving savings, investment, insurance, debt, taxation, superannuation, the age pension and aged care (Chardon, 2011).…”

Defined Contribution Pension Plans: Who Has Seen the Risk?

“…An obvious alternative way to generate retirement cash flows is to buy a lifetime annuity. However, in practice most retirees are not willing to do this, for a variety of reasons (MacDonald et al, 2013). In the current environment of low real interest rates, annuities provide rather low income, so the reluctance of retirees to use them is particularly unsurprising.…”

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

“…Within these categories, several variations have been proposed. MacDonald et al (2013) summarize various possibilities. 1 In a fixed scheme, the amounts taken out each year are constant, typically in real (i.e., inflation-adjusted) terms.…”

“…Individuals then must continue to manage their financial assets but also have to determine a strategy to withdraw assets to pay living expenses with uncertain longevity. It is often suggested that retirees should buy annuities, but for many reasons this rarely happens in practice (MacDonald et al, 2013).…”