Investment Asset Allocation after Retirement under Uncertainty of Life Expectancy
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Abstract
The purpose of this research is to study the asset allocation after retirement to get the highest withdrawal rate at acceptable failure rate. We consider two types of investment assets which are debt instruments and common stocks. The Monte Carlo simulation is employed to find the failure rate of investment portfolio. In addition, we employ the mortality table which shows the probabilities of death for each age group, to reflect the uncertainty of life expectancy. This is different from previous studies which sets the expected length of life to be a constant. From the empirical results, it was found that in the early stages of retirement, at ages 55 and 60, it is still necessary to invest in highly volatile assets such as common stocks, at least 65 percent, because there is still an expected life expectancy of more than 20 years with an appropriate withdrawal rate initially at 5.0 percent to 7.0 percent, depending on your ability to accept risks. After that, when we get older, we will be able to receive a higher withdrawal rate. Then, the proportion of investment in common stocks can be decreased to increase investment in debt instruments as your age increases. Then, the overall volatility of investment portfolio after retirement can be reduced.
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