What is the maximum sustainable withdrawal?
When we have a portfolio consisting of cash and risky assets, we need to know what the optimal combination for their respective weights is. One way to answer this question is to use the maximum sustainable withdrawal.
In general retirement accounts, the retirees have to find maximum sustainable withdrawals from their accounts. For an average account with a portfolio of 60% in stocks and 40% in bonds who takes our 7% a year has only a 30% chance of make that money last 25 years. That same retiree withdrawing 4% a year has a 94% chance of success. Experts say that the 4% is often the withdrawal rate that works best.
Actually, the MSWR (Maximum Sustainable Withdrawal Rate) might be able to increase when cash is added to the portfolio. Cash has two advantages. Cash can be used as cushion during the down-turn markets. Cash can also be used to purchase more securities at discounts when the market is down.
The problem of MSWR is similar to the problem in determine the reservoir size in water resources planning. In water resources planning, the reservoirs are built to sustain the longest droughts. During the drought years, the rive flow is low and not enough to sustain the aggregated water demands for agricultural, industrial, municipal, and environmental uses, water is taken out from the reservoirs to mitigate the low stream flow.
In planning for retirement, the market down-turns are just like the drought years in water resources planning. If we build cash reserves big enough for the market down-turn years, then we can achieve a much higher MSWR.
So the tools used for water resources planning can also be used for MSWR problem. One of the methods used in water resources planning is the mass-curve analysis. The mass-curve method of water-availability analysis is well-established and is extremely useful. Mass curves of available flow show cumulative flow and can be used to indicate cumulative utilization and storage requirements. Adjustments for evaporation and other losses must be made in determining the net volume available from accumulated stream flow. The mass curves of demands show the cumulative demands over time. The reservoir size can be determined by comparing the two curves.
Similarly, the mass-curves for cumulative investment incomes are compared with the mass-curves for cumulative withdrawals. We can determine the required cash reserves similarly as we determine the required reservoir sizes.
In general retirement accounts, the retirees have to find maximum sustainable withdrawals from their accounts. For an average account with a portfolio of 60% in stocks and 40% in bonds who takes our 7% a year has only a 30% chance of make that money last 25 years. That same retiree withdrawing 4% a year has a 94% chance of success. Experts say that the 4% is often the withdrawal rate that works best.
Actually, the MSWR (Maximum Sustainable Withdrawal Rate) might be able to increase when cash is added to the portfolio. Cash has two advantages. Cash can be used as cushion during the down-turn markets. Cash can also be used to purchase more securities at discounts when the market is down.
The problem of MSWR is similar to the problem in determine the reservoir size in water resources planning. In water resources planning, the reservoirs are built to sustain the longest droughts. During the drought years, the rive flow is low and not enough to sustain the aggregated water demands for agricultural, industrial, municipal, and environmental uses, water is taken out from the reservoirs to mitigate the low stream flow.
In planning for retirement, the market down-turns are just like the drought years in water resources planning. If we build cash reserves big enough for the market down-turn years, then we can achieve a much higher MSWR.
So the tools used for water resources planning can also be used for MSWR problem. One of the methods used in water resources planning is the mass-curve analysis. The mass-curve method of water-availability analysis is well-established and is extremely useful. Mass curves of available flow show cumulative flow and can be used to indicate cumulative utilization and storage requirements. Adjustments for evaporation and other losses must be made in determining the net volume available from accumulated stream flow. The mass curves of demands show the cumulative demands over time. The reservoir size can be determined by comparing the two curves.
Similarly, the mass-curves for cumulative investment incomes are compared with the mass-curves for cumulative withdrawals. We can determine the required cash reserves similarly as we determine the required reservoir sizes.
posted by Unknown at 7:24 AM
0 Comments:
Post a Comment
<< Home