Replacing the Failure Rate: A Downside Risk Perspective

Abstract

The evaluation of retirement strategies is typically based on the failure rate, although some alternatives have been proposed recently, such as risk-adjusted success (RAS), which aims to capture not just the failure but also the success of the strategies evaluated. The main shortcoming of RAS is that it measures risk with the standard deviation, which penalizes strategies that leave large bequests. The variable proposed here, downside risk-adjusted success (D-RAS), addresses this shortcoming by taking a downside risk perspective, measuring risk with the semideviation, and therefore with volatility below a chosen benchmark. This modification leads to the selection of more plausible strategies than those selected by both the failure rate and RAS.

Keywords: Retirement strategies; failure rate; risk-adjusted success; downside risk

JEL Classification: G11