Guaranteed Income and Optimal Retirement Glide Paths

Doug Waggle, University of West Florida
Pankaj Agrrawal, University of Maine

Abstract/ Summary

Deciding on asset allocations over time and portfolio withdrawal rates remain key considerations for retirees. These decisions are impacted by factors such as the investor’s wealth level, degree of risk aversion, the desire to leave a bequest, and the presence of guaranteed income, such as Social Security. This paper considers these issues as they relate to utility levels for retirees. • Initial equity allocations from 0 to 100 percent were examined. For investors with moderate and high levels of risk aversion, higher proportions of Social Security relative to overall wealth led to higher initial optimal allocations to stock. This is somewhat intuitive because the higher level of guaranteed income allows for more risk with the remainder of the portfolio. However, retirees who rely more on Social Security are less wealthy, and lower levels of wealth are generally equated with lower allocations to stock. • Five different glide paths, which provide plans for changes in allocations to stocks over time, were considered: increasing the weight of stock slowly, increasing fast, decreasing slowly, decreasing fast, and constant. The typical guidance for retirees is to decrease their allocation to stock over time. This paper finds, however, that increasing glide paths, where the level of stock increases over time, are often optimal.