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Retirement IncomeRisks and Strategies$
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Mark J. Warshawsky

Print publication date: 2011

Print ISBN-13: 9780262016933

Published to MIT Press Scholarship Online: August 2013

DOI: 10.7551/mitpress/9780262016933.001.0001

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Good Strategies for Wealth Management and Income Production in Retirement

Good Strategies for Wealth Management and Income Production in Retirement

(p.163) 7 Good Strategies for Wealth Management and Income Production in Retirement
Retirement Income

Gaobo Pang

The MIT Press

This chapter focuses on a particularly promising strategic approach to wealth distribution in retirement—the combination of withdrawals from mutual funds with a series of immediate life annuity purchases—and examines the optimal split of wealth between them and the exact process of fund-annuity conversion. The success criterion for the strategy search is to minimize the shortfall risk, which is defined as a weighted probability of real income and wealth balances falling below certain thresholds, in a stochastic model. This differs from the conventional analytical assumption that investors maximize their expected utility over consumption and bequests. The goal of the chapter is to find good distribution strategies for DC participants at retirement, considering variations in risk tolerance, income-wealth preferences, ages of retirement, and whether the household is an individual or a couple.

Keywords:   wealth distribution, retirement, mutual funds, life annuity purchases, fund-annuity conversion, shortfall risk, stochastic model, bequests

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