Managing to Target (II): Dynamic Adjustments for Retirement Strategies

Abstract

All individuals need to determine a withdrawal policy for their retirement. This decision needs to balance the goal of funding a desired lifestyle (and perhaps leaving a bequest) with the goal of not running out of money too early, which can best be achieved by outlining a financial plan. When the returns of their portfolios differ from those expected in their plans, what should retirees do? Should they statically stick to the withdrawals specified in their plans? Should they introduce dynamic adjustments to push their portfolios closer to the path outlined in the plans instead? This article evaluates two types of dynamic policies, broadly referred to as “managing to target” (M2T) strategies, that adjust either the periodic withdrawals or the portfolio’s asset allocation. Results reported show that dynamic M2T strategies outperform a static strategy of sticking to the plan and that adjusting withdrawals is superior to adjusting the portfolio’s asset allocation.

TOPICS: Wealth management, retirement

Key Findings

• • It is critical for retirees to have a financial plan that specifies annual withdrawals and a target bequest, thus outlining an expected path for their portfolio.

• • When market conditions change, retirees should have the flexibility to adjust their strategy and push the portfolio closer to the expected path.

• • When adjustments need to be made, it is better to adjust withdrawals than the portfolio’s asset allocation.