Optimal decumulation strategies for retirement solutions

The importance of decumulation strategies in retirement has gained traction in recent years. Government pension reforms are driving a move away from defined benefit (DB) schemes, which promise an income for life, in favour of defined contribution (DC) plans which offer no such guarantee. In Europe, DC plans already account for 26% of retirement assets (USD713.9 billion) and are projected to rise significantly in the next five years, potentially increasing by USD2.5 trillion.

Optimal decumulation strategies for retirement solutions

Designing decumulation strategies involve a high degree of complexity. For example, popular retirees’ goals include a desire to i) receive a steady income, ii) spend as much as possible during retirement (maximise withdrawals) and iii) be protected against the risk of outliving retirement savings. Yet, these cannot all be pursued simultaneously, as they may conflict with each other. Strategies also need to take into account individuals’ preferences for consumption rates, bequests (i.e. inheritance received by heirs or heiresses) and risk tolerance levels.

Our premise is that the management of risks such as inflation and sequencing (unfavourable timings of withdrawals and market losses) as well as longevity, require dynamic management during retirement. To determine decumulation solutions, we propose a new strategy called the “Success Rate Optimiser”.

This sets out income needs in advance, and then uses a dynamic asset allocation approach to optimise a retirement portfolio’s probability of success. Specifically, this approach offers an asset allocation strategy which decreases the risk asset exposure as the value of a portfolio increases. Importantly, it provides a planned income stream and retirees can customise their solutions by selecting consumption patterns, investment horizons and asset mix constraints as well as exit thresholds for bequests and/or annuities. Compared to more traditional decumulation approaches, the Success Rate Optimiser achieves higher success rates in different market environments.

You can now read the full whitepaper at the link below