Finke, Michael and Pfau, Wade Donald and Williams, Duncan (2011): Spending flexibility and safe withdrawal rates.
Download (291kB) | Preview
Shortfall risk retirement income analyses offer little insight into how much risk is optimal, and how risk tolerance affects retirement income decisions. This study models retirement income risk in a manner consistent with risk tolerance in portfolio selection in order to estimate optimal asset allocations and withdrawal rates for retirees with different risk attitudes. We find that the 4 percent retirement withdrawal rate strategy may only be appropriate for risk averse clients with moderate guaranteed income sources. The ability to accept greater shortfall probabilities means that risk tolerant investors will prefer a higher withdrawal rate and a riskier retirement portfolio. A risk tolerant client may prefer a withdrawal rate of between 5 and 7 percent with a guaranteed income of $20,000. The optimal retirement portfolio allocation to stock increases by between 10 and 30 percentage points and the optimal withdrawal rate increases by between 1 and 2 percentage points for clients with a guaranteed income of $60,000 instead of $20,000.
|Item Type:||MPRA Paper|
|Original Title:||Spending flexibility and safe withdrawal rates|
|Keywords:||retirement planning; utility maximization; retirement spending goals; safe withdrawal rates|
|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 - Household Saving; Personal Finance
|Depositing User:||Wade D. Pfau|
|Date Deposited:||05. Nov 2011 18:57|
|Last Modified:||11. Feb 2013 21:41|
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. 2006. Conserving Client Portfolios During Retirement. Denver: FPA Press.
Blanchett, David M., and Brian C. Blanchett. 2008. "Joint Life Expectancy and the Retirement Distribution Period." Journal of Financial Planning 21, 12 (December): 54-60.
Curtis, Robert. 2006. “Monte Carlo Mania.” In Retirement Income Redesigned: Master Plans for Distribution, Harold Evensky and Deena B. Katz (eds). New York: Bloomberg Press.
Guyton, Jonathan T. 2004. "Decision Rules and Portfolio Management for Retirees: Is the 'Safe' Initial Withdrawal Rate Too Safe?" Journal of Financial Planning 17, 10 (October): 54-62.
Ibbotson, Roger G., M.A. Milevsky, P. Chen, and K.X. Zhu. 2007. Lifetime Financial Advice: Human Capital, Asset Allocation, and Insurance. Charlottesville, VA: The Research Foundation of the CFA Institute.
Kitces, Michael E. 2008. "Resolving the Paradox - Is the Safe Withdrawal Rate Sometimes Too Safe?" The Kitces Report (May).
Milevsky, Moshe A. 2006. The Calculus of Retirement Income: Financial Models for Pension Annuities and Life Insurance. New York, NY: Cambridge University Press.
Milevsky, Moshe A., and Huaxiong Huang. 2011. “Spending Retirement on Planet Vulcan: The Impact of Longevity Risk Aversion on Optimal Withdrawal Rates.” Financial Analysts Journal 67, 2 (March/April): 45-58.
Pfau, Wade D. 2010. “An International Perspective on Safe Withdrawal Rates from Retirement Savings: The Demise of the 4 Percent Rule?" Journal of Financial Planning 23, 12 (December): 52-61.
Pfau, Wade D. 2011a. “Safe Savings Rates: A New Approach to Retirement Planning over the Life Cycle.” Journal of Financial Planning 24, 5 (May): 42-50.
Pfau, Wade D. 2011b. “Can We Predict the Sustainable Withdrawal Rate for New Retirees?” Journal of Financial Planning 24, 8 (August): 40-47.
Poterba, J., J. Rauh, S. Venti, and D. Wise. 2005. "Utility Evaluation of Risk in Retirement Savings Accounts." In: D. Wise, ed., Analyses in the Economics of Aging. Chicago: University of Chicago Press: 13-52.
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.
Williams, Duncan, and Michael Finke. 2011. “Determining Optimal Withdrawal Rates: An Economic Approach.” Retirement Management Journal 1, 2 (Fall): 35-46.