Spending Flexibility and Safe Withdrawal Rates

20 Pages Posted: 9 Nov 2011  

Michael S. Finke

The American College

Wade D. Pfau

The American College; McLean Asset Management

Duncan Williams

Texas Tech University

Date Written: 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.

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

Suggested Citation

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

Michael S. Finke (Contact Author)

The American College ( email )

Bryn Mawr, PA 19010
United States

Wade D. Pfau

The American College ( email )

Bryn Mawr, PA 19010
United States

HOME PAGE: http://www.retirementresearcher.com

McLean Asset Management ( email )

8200 Greensboro Dr
# 1150
McLean, VA
United States

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

Paper statistics

Downloads
609
Rank
34,977
Abstract Views
1,879