PORTFOLIO LIQUIDATION STRATEGIES: DECISIONS FOR RETIREMENT ASSETS

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PORTFOLIO LIQUIDATION STRATEGIES DECISIONS FOR
RETIREMENT ASSETS

• Arthur C. Gudikunst, Ph.D.
• Robert B. Hasbrouck, Ph.D.
• School of Business

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Dr. Gs Primer on Pension Plans

• Understanding How You Can Someday Afford to
  Retire from CNU and Still Have Income!

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Defined Benefit PlansThe Virginia Retirement
System (VRS)

• At retirement, employer promises to pay income
  during retirement from formula
• Annual Income (years) times 1.7
• times (Avg. Final Salary)
• 20 times .017 times 50000
• 17,000 for life( COLA)

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Defined Contribution PlansTIAA-CREF

• At retirement, you receive a lump sum of money,
  equal to the amounts deposited by your employer
  over the last 20 years, plus the net earnings
  from the assets in which you invested those
  deposits.

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TIAA-CREF PlanDecisions by Retiree

• Into which assets should the money in the
  retirement account be invested? (stocks, bonds,
  annuity contracts)
• How many total each year are to be withdrawn as
  income for consumption? (20,000 per year, 10 of
  portfolio value, etc.)
• From which asset class should be withdrawn?
• Should the amount invested in different asset
  classes by rebalanced over time?

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Effects on Retiree from Decisions Made

• You withdraw too many each year, and at some
  point in future you have no more invested assets
  and no more income!!!
• You withdraw too few each year, have an unhappy
  lifestyle, but leave lots of to your children
  and favorite charities in your estate.
• You make just the right decisions during
  retirement, living comfortably and still leaving
  an estate for your heirs.

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Current Research Focus

• A Retiree in TIAA-CREF with 1 million in
  portfolio at time of retirement.
• Chooses to invest in mixture of stocks and bonds
  during retirement years.
• Illustrate effects of Key Decision Variables on
  income during retirement years and on ending
  portfolio value 20 years after retirement.

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KEY DECISION VARIABLES

• Initial allocation weights in stocks and bonds
  (i.e., 40 stocks, 60 bonds)
• Withdrawal rate per year as of initial
  portfolio value at start of retirement (10 of 1
  million 100,000 per year)
• Withdrawal strategy from each asset class (i.e.,
  withdraw 40,000 from stocks and 60,000 from
  bond portfolio each year)

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KEY DECISION VARIABLES (CONTD)

• Inflation adjustment, YES or NO
• Rebalance portfolio asset weights each year back
  to the initial asset allocation, YES or NO!

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OUTPUT of RESEARCH

• Illustrate impact of KEY decisions on income
  generated and ending portfolio value during the
  actual 20 year period, 1984-2003. Stock returns
  DJIA index, bond returns ML Corporate/Government
  Master index.
• Simulation model with inputs of future expected
  returns and variability of returns.

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CONCLUSIONS

• Planned withdrawal rate should be lower than
  future expected portfolio return
• The higher the asset allocation to stocks, the
  longer income can continue and the greater will
  be the future portfolio value
• Adjusting withdrawals to compensate for inflation
  will deplete portfolio value faster