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Revisiting the 4% Withdrawal Rule Using Monte Carlo Simulations with Random Market Declines

Author

Listed:
  • Tamimi Nabil

    (PhD; Professor, Operations & Analytics Department, University of Scranton)

  • Sebastianelli Rose

    (PhD; Professor, Operations & Analytics Department, University of Scranton)

  • Rajan Murli

    (PhD, CFA; Professor, Economics and Finance Department, University of Scranton)

  • Rocco Vincent

    (CFA; Faculty Specialist, Operations & Analytics Department, University of Scranton)

Abstract

This paper tracks the performance of a hypothetical retirement portfolio valued at $1,000,000 by applying the popular 4% rule of thumb withdrawals. These withdrawals are adjusted annually to account for simulated inflation and market return rates. Additionally, we incorporate different market shocks that resemble “black swan” events into our analysis. Commencing at a retirement age of 64 and adopting a 30-year retirement planning horizon, we employ Monte Carlo simulations to compute the final value of the portfolio at age 93 under various market shocks. These events occur randomly within the 30-year planning horizon. The average ending portfolio balance and the probability of fund depletion are reported, considering diverse portfolios with a range of asset allocations divided between stocks and bonds. The study's results demonstrate that a portfolio with a higher allocation to equity can yield a superior average ending portfolio balance while reducing the risk of fund depletion.

Suggested Citation

Handle: RePEc:vrs:finprj:v:10:y:2024:i:1:p:18:n:1001
DOI: 10.2478/fprj-2024-0001
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