Modern Portfolio Decumulation: A New Strategy for Managing Retirement Income

Fullmer, Richard K.
August 2007
Journal of Financial Planning;Aug2007, Vol. 20 Issue 8, p40
Academic Journal
• This article outlines a strategy to improve the ability to obtain a stable and steady stream of distributions for life from a retirement portfolio and at the same time fund future wealth goals, such as for gifts and bequests. • Typically, planners suggest managing longevity risk either by annuitization or in the spending plan (by reducing spending in the event of poor market performance or outliving the plan). This paper proposes an alternative method for managing it in the investment portfolio. • Conventional approaches often fail to properly define the investment problem. To be effective, it is important to fully address longevity risk and use appropriate and complete measures of risk and risk aversion. For this problem, modern portfolio theory is an inadequate frame- work for portfolio construction. • A new multiple-period, cash-flow-based investment framework is described that incorporates a dynamic asset allocation strategy and uses the cost of lifetime annuitization as a "hurdle" for managing longevity risk in the portfolio. • By transforming longevity risk into investment risk and actively managing it in the investor's portfolio rather than the spending plan, this approach is particularly useful for investors with a strong desire to maintain a given standard of living.


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