The Multi-Goal Framework: Why Practitioners Have Not Adopted the Lifecycle Model—Yet

Abstract

Investors have multiple goals throughout their lifetime, each requiring complex interconnected decisions about saving, consumption, and asset allocation. Economists have developed a theoretical solution to solve for lifetime retirement income using stochastic dynamic programming. However, practitioner adoption of this approach has been limited. We theorize that this is due to the inability of stochastic dynamic programming to address multiple investor goals due to the inherent computational complexity in the approach. We put forward a life-cycle model incorporating multiple goals that are relevant for retirement investors in the presence of uncertain future asset returns and longevity. Our objective is to maximize investors’ expected utility over their lifetime. We use a goal fulfillment gap as a metric to quantify the value added by an optimized strategy, and to illustrate the optimal consumption and asset-allocation decisions recommended by the model.