Minimizing the Probability of Ruin in Retirement

TL;DR

This paper aims to identify an optimal decumulation strategy in retirement that minimizes the probability of financial ruin, addressing the confusion caused by differing existing recommendations.

Contribution

It introduces a framework to determine the optimal decumulation strategy that minimizes the probability of ruin for retirees.

Findings

Proposes a method to evaluate decumulation strategies

Identifies conditions for optimality in retirement decumulation

Provides insights into reducing the risk of financial ruin

Abstract

Retirees who exhaust their savings while still alive are said to experience financial ruin. These savings are typically grown during the accumulation phase then spent during the retirement decumulation phase. Extensive research into invest-and-harvest decumulation strategies has been conducted, but recommendations differ markedly. This has likely been a source of concern and confusion for the retiree. Our goal is to find what has heretofore been elusive, namely an optimal decumulation strategy. Optimality implies that no alternate strategy exists or can be constructed that delivers a lower probability of ruin, given a fixed inflation-adjusted withdrawal rate.