Efficient Retirement Financial Strategies
30 Pages Posted: 13 Aug 2007
Date Written: July 2007
Today's retirees face the daunting task of determining appropriate investment and spending strategies for their accumulated savings. Financial economists have addressed their problem using an expected utility framework. In contrast, many financial advisors rely instead on rules of thumb. We show that some of the popular rules are inconsistent with expected utility maximization, since they subject retirees to avoidable, non-market risk. We also highlight the importance of earmarking - the existence of a one-to-one correspondence between investments and future spending - and show that a natural way to implement earmarking is to create a lockbox strategy.
Keywords: Retirement, Drawdown, Planning, Lockbox
JEL Classification: D1, D9, E21, G11, G23, H31, J26
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