We determine the optimal asset allocation to bonds and stocks using an annually recalculated virtual annuity (ARVA) spending rule for DC pension plan decumulation. Our objective function minimizes downside withdrawal variability for a given fixed value of total expected withdrawals. The optimal asset allocation is found using optimal stochastic control methods. We formulate the strategy as a solution to a Hamilton–Jacobi–Bellman (HJB) Partial Integro Differential Equation (PIDE). We impose realistic constraints on the controls (no-shorting, no-leverage, discrete rebalancing) and solve the HJB PIDEs numerically. Compared to a fixed-weight strategy which has the same expected total withdrawals, the optimal strategy has a much smaller average allocation to stocks and tends to de-risk rapidly over time. This conclusion holds in the case of a parametric model based on historical data and also in a bootstrapped market based on the historical data.

This paper contributes to research on defined contribution (DC) retirement plans by examining how financial knowledge and demographic factors influenced Chile's pension holders' choice between a default life-cycle retirement plan and active management. About one third of Chileans held default funds in 2009; younger people, men, people with lower incomes, and people with low financial knowledge were more likely to choose the default. For active investors, we examined what variables influenced their choice. Nearly three quarters of active investors chose more risky funds that the defaults for their age group. However, risk taking tended to decrease with age and to increase with income, financial knowledge and risk tolerance.