Capital Market Expectations, Asset Allocation and Safe Portfolio Withdrawal Rates

By Staff Reporters

From: Munich Personal RePEc Archive [MPRA]

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Economist Wade Donald Pfau wrote an article called, “Capital Market Expectations, Asset Allocation, and Safe Withdrawal more than a decade ago. Today, is is still a vital read.


Most retirement withdrawal rate studies are either based on historical data or use a particular assumption about portfolio returns unique to the study in question.

But, financial advisors and planners may have their own capital market expectations for future returns from stocks, bonds, and other assets they deem suitable for their clients’ portfolios. These uniquely personal expectations may or may not bear resemblance to those used for making retirement withdrawal rate guidelines. The objective here is to provide a general framework for thinking about how to estimate sustainable withdrawal rates and appropriate asset allocations for clients based on one’s capital market expectations, as well as other inputs about the client including the planning horizon, tolerance for exhausting wealth, and personal concerns about holding riskier assets.

The study also tests the sensitivity of various assumptions for the recommended withdrawal rates and asset allocations, and finds that these assumptions are very important. Another common feature of existing studies is to focus on an optimal asset allocation, which is expected either to minimize the probability of failure for a given withdrawal rate, or to maximize the withdrawal rate for a given probability of failure. Retirement withdrawal rate studies are known in this regard for lending support to stock allocations in excess of 50 percent.


This study shows that usually there are a wide range of asset allocations which can be expected to perform nearly as well as the optimal allocation, and that lower stock allocations are indeed justifiable in many cases.

Link: MPRA_paper_32973

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NOTE: Wade Donald Pfau is an Associate Professor of Economics at the National Graduate Institute for Policy Studies (GRIPS) in Tokyo, Japan. His PhD in economics was from Princeton University.

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4 Responses

  1. Asset Allocation … is Nuts

    “The paradigm needs to shift: the whole idea of a balanced portfolio with asset allocation – modern portfolio theory – with systematic withdrawal is nuts,” says Erin Botsford, a financial planner and author of “The Big Retirement Risk: Running Out of Money Before You Run Out of Time.”



  2. Colin,

    There is an investing and retirement strategy waiting to unfold given the impetus to participate in the stock market’s rising and almost daily incremental gains.

    Doctors, investors, retirees and near-retirees are feeling compelled to aggressively chase this stock market higher even as hedge fund managers and financial professionals are slowly starting accumulating bets against them in the options and futures markets.

    This is exactly the wrong strategy.

    The time for physicians and all investors to demonstrate confidence and optimism is when it’s rare, putting money into stocks when they are down amid fear and uncertainty from everyone else.

    IOW: Blood in the streets …. think flash-crash 08-09!

    But, not when everyone is suspending disbelief and jumping back-in. Not as we face a repeat of the stag-inflationary 1970s. And, not as the last bastions of support for this bull market start to crack and crumble.

    Dr. David Edward Marcinko MBA


  3. Key benefits of a sound asset allocation strategy include:

    1. Reduced risk: An appropriately allocated portfolio produces lower volatility, or a lower fluctuation in yearly return, by simultaneously spreading market risk across numerous asset class categories (i.e. stocks, bonds)

    2. Steady returns: By investing in a mixture of asset classes, you can advance your chances of participating in market gains and lessen the blow of poor performing asset class categories on overall yearly results.

    3. Meeting long-term goals: A diversified portfolio is designed to assuage the need to constantly adjust investment holdings to chase market trends.

    Keep your alpha high; and your beta low.



  4. Withdrawal Rate Location Strategies?

    And, according to Mike Kitces MSFS CFP retirees might use the following decision-rule framework for liquidations:

    1.If equities are up, take the retirement spending from equities.
    2.If equities are down but bonds are up, take the spending from bonds instead.
    3.If both equities and bonds are down in the same year, take the distribution from Treasury bills.




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