On the impact of low interest rates on common withdrawal rules in old age

An Chen, Stefan Schelling and Nils Sørensen

The European Journal of Finance, 2023, vol. 29, issue 9, 999-1021

Abstract: Ensuring a desired standard of living in retirement has been strongly challenged by increasing life expectancy, and simultaneously by the current and possibly long-lasting low interest environment. In contrast to literature in this field which claims annuitization of wealth being a vital part of retirement planning, many people manage their retirement savings and withdrawal policy during the retirement period independently. To this end, several easily applicable self-managed withdrawal rules are commonly recommended by financial advisors. We cast doubt on the viability of these self-managed withdrawal rules, particularly in an environment with increasing life expectancies and low interest rates. Further, we show that a mixed rule which combines the fixed percentage and the remaining lifetime rule can significantly improve retirees' welfare in an expected utility framework compared to other simple self-managed withdrawal rules. The results provide important insights for revising common recommendations by financial advisors, designing retirement products, and regulation.

Date: 2023
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Persistent link: https://EconPapers.repec.org/RePEc:taf:eurjfi:v:29:y:2023:i:9:p:999-1021

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DOI: 10.1080/1351847X.2022.2097886

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