Investing for Retirement Income: A Comparison of Asset Allocations and Spending Strategies

Abstract

We study the performance of different investment and spending strategies for retirement. Investment strategies include wealth-focused glide paths that combine equities with short-term, high-quality fixed income. We also consider an income-focused glide path that combines a moderate equity allocation at retirement and an inflation-protected bond portfolio that uses liability-driven investing. Spending rules include fixed spending (similar to the 4% rule), flexible spending, as well as nominal and real annuitization. We examine simulated lifetimes with either stochastic longevity or fixed longevity of 30 years in retirement.

We find that, for all spending strategies, an income-focused asset allocation delivers similar retirement income to the wealth-focused allocations we study while offering better protection against market, interest rate, and inflation risk. We also find that a glide path with an LDI portfolio offers a better tradeoff between income growth and income risk management. Finally, our results suggest that high equity exposure in retirement is an inadequate tool to manage longevity risk.