Journal of Personal Finance Vol 15 issue 2

Page 36

Journal of Personal Finance

34

Competing Risks: Death and Ruin

Dirk Cotton, MBA, The Retirement Cafe Cary Cotton, MD, MPH, University of North Carolina Hospital Alex Mears, BS

Abstract Early portfolio survival research in the field of retirement finance largely focused on the probability of outliving one’s retirement portfolio with constant spending over fixed time periods, such as 30 years. Seminal studies by William Bengen, for example, suggested that a retiree can invest his or her savings in a portfolio of stocks and bonds and spend around 4% of his or her initial savings balance annually from the portfolio with about a 5% probability of outliving those savings. Subsequent work by Stout and Mitchell and later by Milevsky and Robinson incorporated random lifetimes, but focused on the lifetime probability of ruin. Medical research uses methods of analyzing survival studies that are novel in retirement research. We use Kaplan-Meier estimates and competing risks analysis to explore the conditional probability of a retiree outliving her savings as age progresses, the relationship of the competing risks of death and ruin as age progresses, and the timing of portfolio failures due to poor market returns. We find that risk of ruin develops in three stages of a long retirement: a low-risk period early in retirement with high sensitivity to market returns but few portfolio failures, a middle period in which portfolio failure peaks, and a late period in which death is much more likely than portfolio ruin.

Š2016, IARFC. All rights of reproduction in any form reserved.


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