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Spending flexibility and safe withdrawal rates

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Author Info

  • Finke, Michael
  • Pfau, Wade Donald
  • Williams, Duncan

Abstract

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.

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Bibliographic Info

Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 34536.

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Date of creation: 05 Nov 2011
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Handle: RePEc:pra:mprapa:34536

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Related research

Keywords: retirement planning; utility maximization; retirement spending goals; safe withdrawal rates;

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References

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  1. David A. Wise, 2005. "Introduction to "Analyses in the Economics of Aging"," NBER Chapters, in: Analyses in the Economics of Aging, pages 1-12 National Bureau of Economic Research, Inc.
  2. Pfau, Wade Donald, 2011. "Can We Predict the Sustainable Withdrawal Rate for New Retirees?," MPRA Paper 30877, University Library of Munich, Germany.
  3. Wade D. Pfau, 2010. "An International Perspective on Safe Withdrawal Rates from Retirement Savings: The Demise of the 4 Percent Rule?," GRIPS Discussion Papers 10-12, National Graduate Institute for Policy Studies, revised Oct 2010.
  4. Pfau, Wade Donald, 2011. "Safe Savings Rates: A New Approach to Retirement Planning over the Lifecycle," MPRA Paper 28796, University Library of Munich, Germany.
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Blog mentions

As found by EconAcademics.org, the blog aggregator for Economics research:
  1. Safe Withdrawal Rates: Have I been barking up the wrong tree?
    by Wade Pfau in Pensions, Retirement Planning, and Economics Blog on 2012-01-16 02:36:00
  2. How Much is Too Much? (Wall Street Journal)
    by Wade Pfau in Pensions, Retirement Planning, and Economics Blog on 2011-11-19 16:03:00
  3. Wall Street Journal: How Much Is Too Much?
    by Wade Pfau in Pensions, Retirement Planning, and Economics Blog on 2011-11-19 03:45:00
  4. Lower Future Returns and Safe Withdrawal Rates
    by Wade Pfau in Pensions, Retirement Planning, and Economics Blog on 2012-04-13 02:40:00
  5. June Advisor Perspectives Column on Retirement Income Floors
    by Wade Pfau in Pensions, Retirement Planning, and Economics Blog on 2012-06-19 02:27:00

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