Retirement Spending on Planet Vulcan: Longevity Risk and Withdrawal Rates
by Moshe A. Milevsky and Huaxiong Huang
Recommendations from the media and financial planners regarding retirement spending rates deviate considerably from utility maximization models (models that assume consumers optimize how they spend money).
We argue that wealth managers should advocate dynamic spending in proportion to survival probabilities, adjusted up for exogenous pension income and down for longevity risk aversion.
We conducted a study to attempt to derive, analyze, and explain the optimal retirement spending policy for a utility-maximizing consumer facing) an indeterminate lifetime. We deliberately ignored financial market risk by assuming that all investment assets are allocated to risk-free bonds (e.g., Treasury Inflation-Protected Securities [TIPS]). We made this simplifying assumption in order to focus attention on the role of longevity risk aversion in determining optimal consumption and spending rates during a retirement period of indeterminate length.
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Huaxiong Huang is a professor of mathematics at York University in Toronto.