Pfau, Wade Donald (2011): Nearly optimal asset allocations in retirement.
Download (243kB) | Preview
An important and frequently studied question for retirees is: what is the optimal asset allocation during retirement? This article provides a brief but simple message that conservative asset allocations in retirement are quite acceptable after all. A wide range of asset allocations tend to provide very similar results in terms of sustainable withdrawal rates for given probabilities of failure. For example, with Monte Carlo simulations based on historical data parameters, a 4.4 percent withdrawal rate for a 30-year horizon could be supported with a 10 percent chance of failure using a 50/50 asset allocation of stocks and bonds. But the range of stock allocations supporting a withdrawal rate within 0.1 percentage points of this maximum extend from 27 to 87 percent. Though asset allocation will also impact the amount which can be left as bequests, it is the case that relatively low stock allocations can support retirees just as well for a given failure rate and retirement duration.
|Item Type:||MPRA Paper|
|Original Title:||Nearly optimal asset allocations in retirement|
|Keywords:||retirement planning; safe withdrawal rates; asset allocation|
|Subjects:||G - Financial Economics > G1 - General Financial Markets > G11 - Portfolio Choice; Investment Decisions
C - Mathematical and Quantitative Methods > C1 - Econometric and Statistical Methods and Methodology: General > C15 - Statistical Simulation Methods: General
D - Microeconomics > D1 - Household Behavior and Family Economics > D14 - Personal Finance
|Depositing User:||Wade D. Pfau|
|Date Deposited:||31. Jul 2011 18:50|
|Last Modified:||16. Feb 2013 04:13|
Bengen, William P. 1994. “Determining Withdrawal Rates Using Historical Data.” Journal of Financial Planning 7, 4 (October): 171-180.
Blanchett, David M. 2007. “Dynamic Allocation Strategies for Distribution Portfolios: Determining the Optimal Distribution Glide Path.” Journal of Financial Planning 20, 12 (December): 68-81.
Blanchett, David M., and Brian C. Blanchett. 2008. "Data Dependence and Sustainable Real Withdrawal Rates." Journal of Financial Planning 21, 9 (September): 70-85.
Cooley, Philip L., Carl M. Hubbard, and Daniel T. Walz. 2011. “Portfolio Success Rates: Where to Draw the Line.” Journal of Financial Planning 24, 4 (April): 48-60.
Harlow, W. Van. 2011. “Optimal Asset Allocation in Retirement: A Downside Risk Perspective.” Putnam Institute – Retirement (June), 1-15.
Pfau, Wade D. 2011a. “The Highest Sustainable Withdrawal Rate Comes from 100% Bonds?” (July) Available from http://wpfau.blogspot.com/2011/07/highest-sustainable-withdrawal-rate.html
Pfau, Wade D. 2011b. “Retirement Withdrawal Rates and Portfolio Success Rates: What Can the Historical Record Teach Us?” Retirement Management Journal 1, 2 (Fall), forthcoming.
Spitzer, John, Jeffrey Strieter, and Sandeep Singh. 2007. “Guidelines for Withdrawal Rates and Portfolio Safety During Retirement.” Journal of Financial Planning 20, 10 (October): 52-59.
Terry, Rory L. 2003. “The Relation Between Portfolio Composition and Sustainable Rates.” Journal of Financial Planning 16, 5 (May): 64–72.