Dynamic Spending and Risk-Based Simulation in Retirement Planning

Abstract

This study employed the RISK simulation to estimate the net portfolio value of a long-term investment in a diversified asset allocation. The simulations take into consideration the risk associated with that investment as presented a number of possible investment scenarios in fixed income and equity securities. The possible set of portfolio weights for combinations of the different securities are considered in each simulation. The model constraint is that asset weights in the portfolio must add up to one. The simulations construct future scenarios by randomly choosing past scenarios and assigning higher probabilities to more recent years. Further, the estimated future value of the investment is then deflated with the deflation factor to determine the present value in today’s Thai baht. For each simulated scenario, the model presents the risk associated with the investment – the value at risk (VaR) – which captures the maximum possible expected portfolio value. Finally, the paper further develops the portfolio optimization technique to determine optimal asset allocation in achieving the desired investment goal to assist retirees when planning their retirement funds by considering any risk associated with simulated scenarios.