Withdrawal Capacity in the Face of Expected and Unexpected Health and Aged-Care Expenses During Retirement

Abstract

We examine the consequences of taking account of costs associated with age-related health treatment and agedcare services during the retirement phase. Simulating asset return data using historical bootstrap simulation, we derive an optimal withdrawal income during retirement using dynamic optimization techniques. The greatest risk to income sustainability occurs when unexpected health costs combine with above-average longevity for conservative investors. High costs of health treatment without a commensurate adjustment in asset allocation toward assets with a less conservative risk-return profile risk premature wealth depletion. The risk of ruin can be mitigated through a dynamic life-cycle strategy during the retirement phase.