Revisiting the 4% Withdrawal Rule Using Monte Carlo Simulations with Random Market Declines

Tamimi Nabil (), Sebastianelli Rose, Rajan Murli and Rocco Vincent
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Tamimi Nabil: PhD; Professor, Operations & Analytics Department, University of Scranton
Sebastianelli Rose: PhD; Professor, Operations & Analytics Department, University of Scranton
Rajan Murli: PhD, CFA; Professor, Economics and Finance Department, University of Scranton
Rocco Vincent: CFA; Faculty Specialist, Operations & Analytics Department, University of Scranton

Financial Planning Research Journal, 2024, vol. 10, issue 1, 18

Abstract: This paper tracks the performance of a hypothetical retirement portfolio valued at $1,000,000 by applying the popular 4% rule of thumb withdrawals. These withdrawals are adjusted annually to account for simulated inflation and market return rates. Additionally, we incorporate different market shocks that resemble “black swan” events into our analysis. Commencing at a retirement age of 64 and adopting a 30-year retirement planning horizon, we employ Monte Carlo simulations to compute the final value of the portfolio at age 93 under various market shocks. These events occur randomly within the 30-year planning horizon. The average ending portfolio balance and the probability of fund depletion are reported, considering diverse portfolios with a range of asset allocations divided between stocks and bonds. The study's results demonstrate that a portfolio with a higher allocation to equity can yield a superior average ending portfolio balance while reducing the risk of fund depletion.

Keywords: Simulation; retirement; asset allocation; market shocks; fund depletion (search for similar items in EconPapers)
Date: 2024
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Persistent link: https://EconPapers.repec.org/RePEc:vrs:finprj:v:10:y:2024:i:1:p:18:n:1001

DOI: 10.2478/fprj-2024-0001

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