Professional Documents
Culture Documents
Preference Model
Risk aversion is a concept developed by Arrow
(1965, 1971) and Pratt (1964), where the goal
is to determine some level of constant
consumption a person would accept in
exchange for a higher average level of
consumption with greater variability. While
there are several utility functions used to
estimate risk aversion, the most common is a
constant relative risk aversion (CRRA) utility
function, as noted by equation [1], which is
the base utility function used for the analysis.
Rank Results
In the previous section, the glide paths were
contrasted based on their respective probabilities
of success over a 30 year retirement period. In
this section, the focus is on the relative rank of
each approach across the 6,561 scenarios. The
rankings are based on the preference model
outlined in Appendix 2, which may be a better
gauge of how a retiree would feel about an
outcome because it incorporates both shortfall
risk and residual wealth preferences and the
relative magnitude of failure (versus being a
simple, bright-line measure).
Summary
This paper provides an overview of the potential
benefit of different retirement glide path shapes.
The results of the analysis suggest that the
actual relative attractiveness of a given glide
path is likely to vary by scenario and
assumptions; however, decreasing glide path
shapesglide paths where the equity allocation
decreases during retirementappear to be more
efficient when compared to the other three
changing glide path shapes considered, as well
as a constant equity glide path.