Redefining the Optimal Retirement Income Strategy

This paper introduces a cohesive series of models designed to improve retirement income projections. First, the retirement income goal (i.e., liability) is decomposed based on assumed spending elasticity (e.g., “needs” and “wants”). Second, spending is assumed to evolve throughout retirement using a dynamic withdrawal strategy leveraging the funded ratio concept. Third, optimal strategies are determined using an expected utility model based on prospect theory, which also yields a client-friendly outcomes metric. Overall, this framework can result in advice and guidance that is notably different than models using more basic (and common) assumptions, especially approaches relying on probability of success-related metrics.