Optimizing Drawdown and Asset Allocation Strategies in the Decumulation Phase of Retirement

Abstract

As a large portion of the clients using retirement accumulation strategies near their retirement phase, there is a growing need for an emphasis on decumulation strategies. With the low interest rate environment and various behavioral biases, people struggle to deftly manage the drawdown process for retirement accounts, leaving them to likely make sub-optimal decumulation decisions. In this study we explore the optimal spending amount and asset allocation for various decumulation strategies, creating a framework to systematically and actively decumulate assets while taking into account bequest motives, social income benefits, and various risks. Using a multi-regime Monte Carlo simulation framework, we evaluate ten decumulation strategies: Annuities, Tontines, SWR Conservative, SWR Balanced, SWR Growth, Lifecycle, Dynamic Zone Glide Path, Mean-Variance, Percentage Drawdown, and Dynamic Drawdown strategies. Overall, we find that tontines are most effective with the highest average annual payoff and least risk, but not suitable for most retiree's needs. Instead, the Dynamic Drawdown strategy is most suitable for a retiree who wishes to have a minimum annual retirement income or leave a bequest. The Dynamic Drawdown strategy with a 4.55% safe withdrawal rate baseline and an asset allocation based on the mean-variance optimization problem outperforms the other strategies. It is 6.32% less likely to run into portfolio ruin over a 30 year time horizon than the next best strategy and draws down on average $9,000 more annually than the popularly advocated 4% SWR strategies.