Asset Valuations and Safe Portfolio Withdrawal Rates

17 Pages Posted: 28 Jun 2013 Last revised: 1 Jul 2013

See all articles by David Blanchett

David Blanchett


Michael S. Finke

The American College

Wade D. Pfau

The American College for Financial Services; Retirement Researcher

Multiple version iconThere are 2 versions of this paper

Date Written: June 27, 2013


Bond yields today are well below and stock market valuations are well above their historical average. There are no historical periods in the United States where comparable low bond yields and high equity valuations have occurred simultaneously. Both current bond yields and stock values have been shown to predict near-term returns. Portfolio returns in the first decade of retirement have an outsize impact on retirement income strategies. Traditional Monte Carlo simulation approaches generally do not incorporate market valuations into their analysis. In order to simulate how retirees will fare in a low return environment for both stocks and bonds, we incorporate the predictive ability of current valuations to simulate its impact on retirement portfolios.

We estimate bond returns through an autoregressive model that uses an initial bond yield value where yields drift in the future. We use the cyclically adjusted price-to-earnings (CAPE) ratio as an estimate of market valuation to predict short-run stock performance. Our simulations indicate that the safety of a given withdrawal strategy is significantly affected by the initial bond yield and CAPE value at retirement, and that the relative impact varies based on the portfolio equity allocation. Using valuation measures current as of April 15, 2013, which is a bond yield of 2.0% and a CAPE of 22, we find the probability of success for a 40% equity allocation with a 4% initial withdrawal rate over a 30 year period is approximately 48%. This success rate is materially lower than past studies and has sobering implications on the likelihood of success for retirees today, as well as how much those near retirement may need to save to ensure a successful retirement.

Keywords: retirement, asset valuations, withdrawal rates, Monte Carlo

JEL Classification: D12, D91, G11, J26

Suggested Citation

Blanchett, David and Finke, Michael S. and Pfau, Wade D., Asset Valuations and Safe Portfolio Withdrawal Rates (June 27, 2013). Available at SSRN: or

David Blanchett

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Michael S. Finke (Contact Author)

The American College ( email )

Bryn Mawr, PA 19010
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Wade D. Pfau

The American College for Financial Services ( email )

630 Allendale Rd
King of Prussia, PA 19406
United States


Retirement Researcher ( email )

1900 Gallows Rd, Suite 350
Vienna, VA 22182
United States


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