Adaptive Retirement Planning, Sustainable Withdrawals, and Deferred Annuities

Abstract

In this article, we integrate investment decisions in the post-retirement period with the inclusion of a deferred annuity (DA) to provide a lifetime decumulation solution. We use the perfect withdrawal rate (PWR) as a tool to make recommendations on withdrawal rates and asset allocations. We illustrate how cheap it is to use a DA to deal with longevity risk. Moreover, if individuals want to maximize median PWR, they should allocate almost 100% in stocks. If they want to maximize minimum PWR, they should allocate 40%–60% in stocks. A substantial stocks component should therefore be maintained throughout the retirement period as a new “normal” asset allocation.