Event Title

Establishing an Optimal Withdrawal Rate and Portfolio Allocation for FIRE Investors

Session Title

Accounting, Finance, and Economics

Document Type

Oral Presentation

College

College of Business Administration

Department

Department of Accounting, Finance, and Economics

Honors Thesis Committee

Yuanshan Cheng, Ph.D.; Philip Gibson, Ph.D.; and P.N. Saksena, Ph.D.

Description

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

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Apr 24th, 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