A Sustainable Spending Rate Without Simulation

Posted: 30 Dec 2005

See all articles by Moshe A. Milevsky

Moshe A. Milevsky

York University - Schulich School of Business

Chris A. Robinson

York University - Schulich School of Business

Abstract

Financial commentators have called for more research on sustainable spending rates for individuals and endowments holding diversified portfolios. We present a forward-looking framework for analyzing spending rates and introduce a simple measure, stochastic present value, that parsimoniously meshes investment risk and return, mortality estimates, and spending rates without resorting to opaque Monte Carlo simulations. Applying it with reasonable estimates of future returns, we find payout ratios should be lower than those many advisors recommend. The proposed method helps analysts advise their clients how much they can consume from their savings, whether they can retire early, and how to allocate their assets.

Keywords: Private Wealth Management, Asset Allocation, Portfolio Management, Asset/Liability Management, Investment Policy

Suggested Citation

Milevsky, Moshe Arye and Robinson, Chris A., A Sustainable Spending Rate Without Simulation. Financial Analysts Journal, Vol. 61, No. 6, pp. 89-100, November/December 2005. Available at SSRN: https://ssrn.com/abstract=872871

Moshe Arye Milevsky (Contact Author)

York University - Schulich School of Business ( email )

4700 Keele Street
Toronto, Ontario M3J 1P3
Canada

Chris A. Robinson

York University - Schulich School of Business ( email )

4700 Keele Street
Toronto, Ontario M3J 1P3
Canada

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