Testing of retirement portfolio sustainability: simulation vs analysis with historical data

The article examines the problem of determining asset allocation of sustainable retirement portfolio. While principles of modern portfolio theory are perfectly suitable in retirement portfolio accumulation stage, they may not be applicable in the decumulation stage of human cycle when withdrawals from retirement portfolio are being made to fund retirement expenditure. The lack of widely accepted methodology to solve the puzzle of asset allocation of retirement portfolio during retirement period has been noticed. This research focuses on three different methods to determine asset allocation of retirement portfolio (heuristics, multiple horizon approach and stochastic optimization) for a retiree and incorporates both stochastic simulation and analysis with historical data to evaluate the sustainability of retirement portfolios formed using different methods under investigation. The research results are presented and the important aspects of both stochastic simulation and analysis with historical data are highlighted