Post-Retirement Financial Strategies: Forecasts and Valuation

This paper uses a discrete‐time, discrete‐state Monte Carlo simulation model to evaluate representative strategies for investing and spending a fixed sum designed to fund consumption during the period after retirement. Two assets are considered – one providing a riskless real return, the other a mar...

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Bibliographic Details
Published in:European financial management : the journal of the European Financial Management Association 2012-06, Vol.18 (3), p.324-351
Main Author: Sharpe, William F.
Format: Article
Language:English
Subjects:
Arrow-Debreu state prices
Bonds
Consumption
D14
Discrete-time model
Evaluation
Financial models
G11
G17
G21
Investment returns
Monte Carlo simulation
Portfolio analysis
pricing
Retirement
Retirement planning
Return on investment
simulation
Stochastic processes
Stocks
Strategic management
strategy
Studies
valuation
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Summary:This paper uses a discrete‐time, discrete‐state Monte Carlo simulation model to evaluate representative strategies for investing and spending a fixed sum designed to fund consumption during the period after retirement. Two assets are considered – one providing a riskless real return, the other a market portfolio of bonds and stocks. A stochastic process for the returns from the market portfolio is proposed. Then a set of Arrow‐Debreu state prices is obtained on the assumption that the market portfolio is an efficient investment strategy. The model is used to forecast ranges of consumption and ranges of the ratios of year‐to‐year consumption, and also to estimate the values of components of future consumption.
ISSN:1354-7798
1468-036X
DOI:10.1111/j.1468-036X.2011.00639.x