Pfau, Wade Donald (2011): Capital market expectations, asset allocation, and safe withdrawal rates.
Download (350kB) | Preview
Most retirement withdrawal rate studies are either based on historical data or use a particular assumption about portfolio returns unique to the study in question. But planners may have their own capital market expectations for future returns from stocks, bonds, and other assets they deem suitable for their clients’ portfolios. These uniquely personal expectations may or may not bear resemblance to those used for making retirement withdrawal rate guidelines. The objective here is to provide a general framework for thinking about how to estimate sustainable withdrawal rates and appropriate asset allocations for clients based on one’s capital market expectations, as well as other inputs about the client including the planning horizon, tolerance for exhausting wealth, and personal concerns about holding riskier assets. The study also tests the sensitivity of various assumptions for the recommended withdrawal rates and asset allocations, and finds that these assumptions are very important. Another common feature of existing studies is to focus on an optimal asset allocation, which is expected either to minimize the probability of failure for a given withdrawal rate, or to maximize the withdrawal rate for a given probability of failure. Retirement withdrawal rate studies are known in this regard for lending support to stock allocations in excess of 50 percent. This study shows that usually there are a wide range of asset allocations which can be expected to perform nearly as well as the optimal allocation, and that lower stock allocations are indeed justifiable in many cases.
|Item Type:||MPRA Paper|
|Original Title:||Capital market expectations, asset allocation, and safe withdrawal rates|
|Keywords:||retirement planning; safe withdrawal rates; asset allocation; capital market expectations|
|Subjects:||G - Financial Economics > G1 - General Financial Markets > G11 - Portfolio Choice; Investment Decisions
N - Economic History > N2 - Financial Markets and Institutions > N22 - U.S.; Canada: 1913-
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:||25. Aug 2011 02:48|
|Last Modified:||11. Feb 2013 20:45|
Athavale, Manoj, and Joseph M. Goebel. 2011. “A Safer Safe Withdrawal Rate using Various Return Distributions.” Journal of Financial Planning 24, 7 (July): 36-43.
Bengen, William P. 1994. “Determining Withdrawal Rates Using Historical Data.” Journal of Financial Planning 7, 4 (October): 171-180.
Bengen, William P. 1996. “Asset Allocation for a Lifetime.” Journal of Financial Planning 9, 4 (August): 58–67.
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. 1998. “Retirement Spending: Choosing a Sustainable Withdrawal Rate.” Journal of the American Association of Individual Investors 20, 2 (February): 16–21.
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.
Huebscher, Robert. 2011. “The Simplest, Safest Withdrawal Rate.” Advisor Perspectives (August). http://advisorperspectives.com/newsletters11/The_Simplest_Safest_Withdrawal_Strategy.php
Pfau, Wade D. 2011. “Capital Market Expectations, Asset Allocation, and Safe Withdrawal Rates: Additional Results.” Pensions, Retirement Planning, and Economics blog (August 24). http://wpfau.blogspot.com/2011/08/swr.html
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.