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Capital market expectations, asset allocation, and safe withdrawal rates

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  • Pfau, Wade Donald

Abstract

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.

Suggested Citation

  • Pfau, Wade Donald, 2011. "Capital market expectations, asset allocation, and safe withdrawal rates," MPRA Paper 32973, University Library of Munich, Germany.
  • Handle: RePEc:pra:mprapa:32973
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    File URL: https://mpra.ub.uni-muenchen.de/32973/1/MPRA_paper_32973.pdf
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    1. Pfau, Wade Donald, 2011. "Capital market expectations, asset allocation, and safe withdrawal rates," MPRA Paper 32973, University Library of Munich, Germany.
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    Citations

    Blog mentions

    As found by EconAcademics.org, the blog aggregator for Economics research:
    1. How Much is Too Much? (Wall Street Journal)
      by Wade Pfau in Pensions, Retirement Planning, and Economics Blog on 2011-11-19 22:03:00
    2. Wall Street Journal: How Much Is Too Much?
      by Wade Pfau in Pensions, Retirement Planning, and Economics Blog on 2011-11-19 09:45:00
    3. Do-It-Yourself Safe Withdrawal Rates
      by Wade Pfau in Pensions, Retirement Planning, and Economics Blog on 2011-10-27 19:31:00
    4. Capital Market Expectations, Asset Allocation, and Safe Withdrawal Rates
      by Wade Pfau in Pensions, Retirement Planning, and Economics Blog on 2011-08-25 12:09:00
    5. Lower Future Returns and Safe Withdrawal Rates
      by Wade Pfau in Pensions, Retirement Planning, and Economics Blog on 2012-04-13 07:40:00
    6. Public Speaking and more Q&A from Advisors4Advisors Webinar
      by Wade Pfau in Pensions, Retirement Planning, and Economics Blog on 2012-05-20 08:45:00

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    Cited by:

    1. Pfau, Wade Donald, 2011. "Capital market expectations, asset allocation, and safe withdrawal rates," MPRA Paper 32973, University Library of Munich, Germany.

    More about this item

    Keywords

    retirement planning; safe withdrawal rates; asset allocation; capital market expectations;

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • N22 - Economic History - - Financial Markets and Institutions - - - U.S.; Canada: 1913-
    • 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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