ARTICLE IN PRESS JID: FRL [m3Gsc;December 26, 2016;21:15] Finance Research Letters 000 (2016) 1–5 Contents lists available at ScienceDirect Finance Research Letters journal homepage: www.elsevier.com/locate/frl Impact of persistent bad returns and volatility on retirement outcomes Anup K. Basu a , Osei K. Wiafe b,* a School of Economics and Finance, Queensland University of Technology, Gardens Point Campus, Brisbane, QLD 4001, Australia b Griffith Centre for Personal Finance and Superannuation (GCPFS), Griffith Business School, Griffith University, Nathan, QLD 4111, Australia a r t i c l e i n f o Article history: Received 20 September 2016 Revised 21 December 2016 Accepted 23 December 2016 Available online xxx JEL classifications: D03 G11 G17 J26 J32 Keywords: Retirement Probability of shortfall Ruin risk Equity allocation Volatility a b s t r a c t We examine wealth outcomes and risk of ruin faced by retirees due to persistent bad re- turns and high volatility in equity markets occurring at different stages of their retirement. Our results show poor equity returns persisting over long periods can put retirement se- curity to serious risk but volatile market conditions actually have the opposite impact. The timing of such persistent bad returns and volatility (early or late stages of retirement) is critical and has differing effects on retirement outcomes. The results are robust to varying portfolio allocations to equities although the precise impacts are different. © 2016 Elsevier Inc. All rights reserved. 1. Introduction Retirees are often advised to adopt a ‘safety first’ approach to ensure their nest eggs are able to provide a steady source of income over their lifetime. However, a general consensus has emerged that holding some equities in the retired investor’s portfolio is essential to generate adequate income to fund a comfortable retirement and minimise the risk of outliving their assets. For example, Bengen (1994; 1997) recommends a portfolio allocation of 50% to 75% to equities to allow for a sustainable retirement. Others like Cooley, Hubbard, and Walz (1999) find that a portfolio with 75% allocated in stocks and the rest allocated in corporate bonds can sustain 4–5% inflation adjusted annual withdrawals. More recent studies like Bewley et al. (2007) suggests that, due to ever increasing life expectancy, sustaining over longer periods in retirement makes the case for allocating to equities stronger for investors till they get to the late stages of retirement. Holding equities in retirement can benefit the retiree’s portfolio by harvesting the equity premium historically observed over long horizons. Indeed, Cooley et al. (2003) suggest that most retirees allocate between 25% and 75% of their retirement portfolio to equities. Yet this allocation strategy carries significant risk of depletion of retirement savings in the event of * Corresponding author. E-mail address: o.wiafe@griffith.edu.au (O.K. Wiafe). http://dx.doi.org/10.1016/j.frl.2016.12.011 1544-6123/© 2016 Elsevier Inc. All rights reserved. Please cite this article as: A.K. Basu, O.K. Wiafe, Impact of persistent bad returns and volatility on retirement outcomes, Finance Research Letters (2016), http://dx.doi.org/10.1016/j.frl.2016.12.011