Death or Bust? The Risk with Post-Retirement Models: A Quantitative Evaluation

Abstract

The purpose of this report is to quantitatively evaluate whether commonly used models of asset returns pose a threat to the successful retirement of retirees. In doing so, we evaluate the whether the 4% ‘safe’ withdrawal rule holds with more realistic models of market behaviour. Our approach comprises a quantitative evaluation seven of the most common portfolio simulation approaches including: Simple analytic formula; Historical backtesting; Bootstrapping; Analytic Stochastic; Simple Monte Carlo; Filtered Historical Simulation; Regime Switching Monte Carlo. Our results indicate that not all commonly used models are suitable for post-retirement pension planning. Our research shows that it is critical that portfolio frictions, like platform fees and adviser costs, are included in the modelling process as not to do so misrepresents the risks to the client substantially. Given these higher risks, we conclude that UK clients need to be supported with variable expenditure plans, and some security for both income and longevity.