Determination of Asset Allocation for a Sustainable Retirement Portfolio Using a Dynamic Stochastic Simulation

Aušra Klimavičienė


Due to the instability of world economy, increased longevity, higher healthcare and long-term care costs, an adequate retirement income level is a daunting challenge today. A sharp drop in equity markets in 2008 has reduced both private savings and pension fund assets. Today’s retirees have to make increasingly complex financial decisions. Gone are the days when one could rely solely on the social security system. The increasing topicality of sophisticated retirement planning is obvious, as retirees will soon be expected to fund larger portions of their retirement spending. The questions of retirement portfolio management will gain focal attention. While various measures can be undertaken to accommodate the individual needs, goals and wishes of today’s retirees, the article focuses on how smart portfolio construction can extend the longevity of retirement savings and even enhance the returns. The article reviews the results of former pieces of research in the field of retirement portfolio formation and discusses several methods to determine asset allocation for a retirement portfolio, including the heuristic and the multiple horizon approach and stochastic optimization methods. In this paper, dynamic stochastic simulation and stochastic optimization techniques in Monte Carlo simulation models created by the author are applied to identify the optimal portfolio allocations for minimizing the probabilities of depleting the retirement portfolio earlier than the planned retirement horizon (often termed portfolio ruin or shortfall risk) by making constant inflation-adjusted withdrawals.


sustainable retirement portfolio; methods to determine asset allocation of retirement portfolio; stochastic optimization; probability of retirement portfolio ruin

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"Societal studies" ISSN online 2029-2244 / ISSN print 2029-2236