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 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.