Establishing an Optimal Withdrawal Rate and Portfolio Allocation for FIRE Investors
Session Title
Accounting, Finance, and Economics
College
College of Business Administration
Department
Accounting, Finance & Economics
Abstract
There is a relatively new movement among young investors called Financial Independence Retire Early (FIRE). A significant portion of FIRE investors are in their mid- to upper thirties. While this movement of being financially independent and retiring early has become more popular, little research has been done on the sustainability of their financial assets over the course of their lives. One of the first studies to look at an optimal portfolio withdrawal rate, was done by Bengen (1994). Bengen looked at individuals who retired around age 65, and determined that if these individuals withdrew four percent of their portfolios, adjusted for inflation and appropriate asset allocation, their portfolios would last throughout retirement. More recently, a study by Finke, Pfau and Blanchett (2013) shows that the historical four-percent withdrawal rate is not optimal for today’s low interest rate environment. They determined that a more ideal rate would be closer to three percent. While both studies provided guidance on how much money someone should spend each year in retirement, they only looked at individuals who retired after age 65. So, what is a sustainable withdrawal rate for those who attain financial independence and retire at an early age? Furthermore, individuals who retire before age 65 do not have access to Medicare, which means they will have higher healthcare costs from health insurance premiums. The purpose of this study is to determine an appropriate withdrawal rate and portfolio allocation for individuals who retire in their late 30s or early 40
Honors Thesis Committee
Yuanshan Cheng, Ph.D.; Philip Gibson, Ph.D.; and P.N. Saksena, Ph.D.
Start Date
24-4-2020 12:00 AM
Establishing an Optimal Withdrawal Rate and Portfolio Allocation for FIRE Investors
There is a relatively new movement among young investors called Financial Independence Retire Early (FIRE). A significant portion of FIRE investors are in their mid- to upper thirties. While this movement of being financially independent and retiring early has become more popular, little research has been done on the sustainability of their financial assets over the course of their lives. One of the first studies to look at an optimal portfolio withdrawal rate, was done by Bengen (1994). Bengen looked at individuals who retired around age 65, and determined that if these individuals withdrew four percent of their portfolios, adjusted for inflation and appropriate asset allocation, their portfolios would last throughout retirement. More recently, a study by Finke, Pfau and Blanchett (2013) shows that the historical four-percent withdrawal rate is not optimal for today’s low interest rate environment. They determined that a more ideal rate would be closer to three percent. While both studies provided guidance on how much money someone should spend each year in retirement, they only looked at individuals who retired after age 65. So, what is a sustainable withdrawal rate for those who attain financial independence and retire at an early age? Furthermore, individuals who retire before age 65 do not have access to Medicare, which means they will have higher healthcare costs from health insurance premiums. The purpose of this study is to determine an appropriate withdrawal rate and portfolio allocation for individuals who retire in their late 30s or early 40
