Abstract

http://ssrn.com/abstract=1956727
 
 

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Spending Flexibility and Safe Withdrawal Rates


Michael S. Finke


Texas Tech University

Wade D. Pfau


The American College

Duncan Williams


Texas Tech University

November 8, 2011


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.

Number of Pages in PDF File: 20

Keywords: retirement planning, retirement income, shortfall risk, safe withdrawal rates

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Date posted: November 9, 2011  

Suggested Citation

Finke, Michael S. and Pfau, Wade D. and Williams, Duncan, Spending Flexibility and Safe Withdrawal Rates (November 8, 2011). Available at SSRN: http://ssrn.com/abstract=1956727 or http://dx.doi.org/10.2139/ssrn.1956727

Contact Information

Michael S. Finke (Contact Author)
Texas Tech University ( email )
2500 Broadway
Lubbock, TX 79409
United States
Wade D. Pfau
The American College ( email )
Bryn Mawr, PA 19010
United States
HOME PAGE: http://www.retirementresearcher.com
Duncan Williams
Texas Tech University ( email )
2500 Broadway
Lubbock, TX 79409
United States
HOME PAGE: http://www.depts.ttu.edu/pfp/phd/vita/Williams_Duncan.pdf
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References:  16
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