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Nearly optimal asset allocations in retirement

Author

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  • Pfau, Wade Donald

Abstract

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.

Suggested Citation

  • Pfau, Wade Donald, 2011. "Nearly optimal asset allocations in retirement," MPRA Paper 32506, University Library of Munich, Germany.
  • Handle: RePEc:pra:mprapa:32506
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    File URL: https://mpra.ub.uni-muenchen.de/32506/1/MPRA_paper_32506.pdf
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    References listed on IDEAS

    as
    1. Pfau, Wade Donald, 2011. "Retirement Withdrawal Rates and Portfolio Success Rates: What Can the Historical Record Teach Us?," MPRA Paper 31122, University Library of Munich, Germany.
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    Blog mentions

    As found by EconAcademics.org, the blog aggregator for Economics research:
    1. Nearly Optimal Asset Allocations in Retirement
      by Wade Pfau in Pensions, Retirement Planning, and Economics Blog on 2011-07-31 19:35:00

    More about this item

    Keywords

    retirement planning; safe withdrawal rates; asset allocation;

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • C15 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Statistical Simulation Methods: General
    • D14 - Microeconomics - - Household Behavior - - - Household Saving; Personal Finance

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