Post-retirement financial planning with discrete dynamic programming: a practical approach

Purpose: To find the optimal consumption and investment strategy for Australian retirees subject to the availability of age pension. Originality: I have taken age pension into account of dynamic programming process. I assumed stock return to follow its historical distribution instead of Normal distribution. And I used a special form of utility function which allow the retire to balance expected consumption and probability of ruin. Key Literature / Theoretical Perspective: Analyst the effect of age pension on the optimal consumption and investment behaviour of Australian retirees. Methodology: Numerical Dynamic Programming Method Findings: Normal distribution is not a bad approximation to historical return. Dynamic Programming gives optimal consumption strategy but not optimal investment strategies. Research Limitations/Implications: I have not taken into account housing, health, annuities and realistic retirement spending needs. Practical and Social Implications: Age pension accounts for 80% of Australian retiree’s income, taken this into account is very important in financial planning and a big step towards making dynamic programming method practical in Australia.