How risky is your retirement income risk model?

Authors

  • Patrick J. Collins School of Management, University of San Francisco
  • Huy Lam Schultz Collins, Inc.
  • Josh Stampfli 151 Rock Creek Lane, Scarsdale, NY

DOI:

https://doi.org/10.61190/fsr.v24i3.3335

Keywords:

Risk modeling, Retirement income, Portfolio sustainability, Monte Carlo simulation, The 4% rule

Abstract

Adequately sustaining lifetime income is a critical portfolio objective for retired investors. This article provides a brief review of various retirement income modeling approaches including historical back testing, Monte Carlo simulations, and other more advanced risk modeling techniques. Implau- sible assumptions underlying common risk models may mislead investors concerning the risk and return expectations of their retirement investment strategies. We compare risk models, evaluate their credibility, and demonstrate how an oversimplified model may distort the risks retired investors face. Differences in sustainability rates are stark: 4% failure at the low end versus 49% failure at the high end. The article ends with general comments regarding model risk and practitioner investment advice.

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Published

2015-09-30

How to Cite

Collins, P. J., Lam, H., & Stampfli, J. (2015). How risky is your retirement income risk model?. Financial Services Review, 24(3), 193–216. https://doi.org/10.61190/fsr.v24i3.3335

Issue

Vol. 24 No. 3 (2015): Fall 2015

Section

New Original Submission

License

Copyright (c) 2015 Academy of Financial Services

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