Optimal Equity Glidepaths in Retirement

TL;DR

This paper derives the optimal static retirement glidepath that maximizes the probability of successful retirement outcomes, providing a new benchmark for retirement planning strategies.

Contribution

It introduces a novel method to determine the optimal static glidepath based on the probability of ruin, a new contribution to retirement finance literature.

Findings

Optimal static glidepath maximizes success probability.

Provides a new benchmark for retirement planning.

Shape of the glidepath is of practical interest.

Abstract

Dynamic retirement glidepaths evolve over time based on some measure such as the retiree's funded status or current market valuations. Conversely, static glidepaths are fixed at a starting point and selected under the assumption that they will not change. In practice, new static glidepaths may be derived periodically making them more flexible. The optimal static retirement glidepath would be the one that performs better than all others with respect to some metric. When systematic withdrawals are made from a retirement portfolio, glidepaths are often assessed via the probability of ruin (or success). Our goal here is to derive the optimal static glidepath with respect to this metric. It is a result new to the literature and the shape will be of special interest to retirees, financial advisors, retirement researchers, and target-date fund providers.