Safe Withdrawal Rates, Optimal Retirement Portfolios, and Certainty-Equivalent Spending
33 Pages Posted: 13 May 2013 Last revised: 2 Aug 2013
Date Written: May 11, 2013
We test a parametric retirement spending strategy incorporating constant spending, variable spending, smoothing, and mortality updating, which reduces to common strategies with suitably chosen parameters. We examine the relationship between spending and shortfall risk over a large universe of parameters and portfolios. Using certainty equivalent spending with constant relative risk aversion, we observe that risk-neutral retirees will maximize lifetime spending, while highly risk-averse retirees will tend toward a fixed spending strategy, such as the Bengen ‘4% rule’. We discuss how practitioners and retirees with risk aversion between these extremes can identify optimal strategies balancing income and shortfall risk.
Keywords: 4% rule, efficient frontier, retirement, retirement income modeling, retirement planning, safe withdrawal rates, sustainable withdrawal rates, systematic withdrawals
JEL Classification: G11, O16
Suggested Citation: Suggested Citation