EFFECTS OF BEQUESTS AND VARIABLE SPENDING RULES

There are two features of the simulations discussed above that need to be investigated. First, the simulations assume the retirees are willing to use up wealth during their lifetimes. Some retirees may want to leave a bequest to charity or to their heirs. By introducing a planned bequest, the retiree also provides a cutoff point for the spending plan before wealth is more seriously depleted by market events. After all, not many retirees will adhere to a spending plan that completely impoverishes them. Second, the simulations assume that the retirees will keep spending at a given rate regardless of how high or low their investment returns are. We will investigate changing both features.

Consider first the bequest motive. The simulations might be designed so that the target level of wealth at death is some fraction of the original wealth level (adjusted for inflation). The retirees may choose this target for two different reasons. As stated above, the higher target will provide a bequest after death. But the higher target may also be chosen because retirees regard a decline in the portfolio anywhere near 100 percent as a disaster. Instead of a target level of zero wealth at death, suppose we assume that the retirees have a target level equal to 50 percent of the initial wealth.

Raising the target level of wealth will raise the probability of failure, since now failure is defined as having initial wealth fall below 50 percent of the ...

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