5. Dynamic income strategy
With a dynamic strategy, retirees adjust their spending based on the performance of their portfolio and its resulting effect on a Monte Carlo simulation. For example, a retiree targeting an 85% chance of success in a Monte Carlo simulation might increase their income if this figure rises to 95% but decrease income if it falls below 75%. This ‘guardrails’ approach can also be improved by introducing risk-based measures as well.
While retirees will appreciate the opportunity to increase their incomes, they will also have to be prepared for reduced incomes when their probability of success hits the lower guardrail.
6. Insurance strategy
Finally, retirees can use an insuring strategy, in which they use their assets to purchase a guaranteed income stream, typically through an immediate fixed annuity. This has the advantage of guaranteeing a certain income for the life of the retiree (or both members of a couple) regardless of market conditions, and unlike the asset-liability management approach, it also covers the uncertainty of longevity (as annuity payments can be ‘for life’).
However, purchasing such an annuity is an irrevocable commitment of capital, and includes costs associated with the product.