Sensitivity of Safe Withdrawal Rates to Longevity, Market and Failure Risk Preferences with Implications for Asset Allocation

21 Pages Posted: 10 Mar 2013  

Adam Butler

ReSolve Asset Management

Mike Philbrick

ReSolve Asset Management

Rodrigo Gordillo

ReSolve Asset Management

Michael Guan

Macquarie Group – Darwin Investment Strategies

Date Written: March 8, 2013

Abstract

Retirees face longevity risk, or the risk of living longer (or less long) than expected; market risk, or the risk of poor investment returns over the retirement horizon, and finally; failure risk, or the risk of running out of money before death. The authors examine the sensitivity of these three risks to asset allocation and Safe Withdrawal Rates, and offer a model to optimize these factors in order to minimize the three primary risks in the context of personal preferences. Finally, a forecast model is proposed to link Safe Withdrawal Rates to contemporaneous stock market valuations and interest rates, with strong statistical significance.

Keywords: Retirement, Longevity, Aftcast, Safe Withdrawal Rates, SWR, Maximum Withdrawal Rates, MWR, CAPE, Aftcast, Tactical Asset Allocation, Adaptive Asset Allocation

JEL Classification: G1, D1, C5

Suggested Citation

Butler, Adam and Philbrick, Mike and Gordillo, Rodrigo and Guan, Michael, Sensitivity of Safe Withdrawal Rates to Longevity, Market and Failure Risk Preferences with Implications for Asset Allocation (March 8, 2013). Available at SSRN: https://ssrn.com/abstract=2230550 or http://dx.doi.org/10.2139/ssrn.2230550

Adam Butler (Contact Author)

ReSolve Asset Management ( email )

1 Adelaide St. East, Suite 2000
Toronto, Ontario M5C 2V9
Canada
4165725477 (Phone)

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

Mike Philbrick

ReSolve Asset Management ( email )

1 Adelaide St. East, Suite 2000
Toronto, Ontario M5C 2V9
Canada
4165725478 (Phone)

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

Rodrigo Gordillo

ReSolve Asset Management ( email )

1 Adelaide Street East
Suite 2100
Toronto, Ontario M5C 2V9
Canada
416-864-3597 (Phone)

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

Michael Guan

Macquarie Group – Darwin Investment Strategies ( email )

Brookfield Place
181 Bay Street, Suite 3200
Toronto, Ontario M5J 2T3
Canada

HOME PAGE: http://www.macquarieprivatewealth.ca/darwin

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