Risk tolerance is an input in TPAW, and the asset allocation that corresponds to that risk tolerance is an output. This asset allocation takes into account your risk tolerance as well as future cash flows (future savings, retirement income, extra expenses, etc.). As ScubaHogg mentioned, this minimizes sequence of return risk (SORR) already. These posts go more into how that works:I think I have some fundamental misunderstanding of how TPAW work, maybe you can help me.
I was simulating a few examples with about $3mil net worth, immediate retirement scenario. The one thing that I am puzzled is that the asset allocation is "prescribed" to me.
The way I was intending to do it, is that I have a plan for my portfolio. I'm doing a bond tent, which is start at 50/50, glide up to 80/20 within some next N years (N is TBD, I'm working on it). This is to reduce SRR risk. I would then like to understand how much I can withdraw each year and get the nice visualization of worst case vs best case amounts projected out to retirement.
Am I just doing it wrong, or is my approach simply incompatible with the TPAW method?
How retirement income responds to a poor sequence of returns (temporary crash)
Why retirement income recovers fully after a poor sequence of returns (temporary crash)
Time diversification of stock risk
Asset allocation on the savings portfolio
Why calculate the present value of the pension?
The idea that a bond tent reduces SORR is based on the fixed withdrawal assumption. With variable withdrawals, bond tents will increase risk rather than reduce it. Variable and fixed withdrawals work pretty differently, so it's important to model variable withdrawals explicitly when considering the optimal asset allocation for it. Fortunately the optimal asset allocation for variable withdrawals is pretty well understood mathematically. In the absence of future cash flows, the optimal asset allocation is a fixed allocation. That's what diversifies risk over time and minimizes risk for a given expected return. When there are future cash flows, we can adjust for that by including the value of the cash flows in the "total portfolio" and maintaining a fixed asset allocation on that. That's the asset allocation given by the TPAW strategy.
If you instead want to enter a specific glide path, you can use the SPAW strategy to do that. In the planner, go to Advanced -> Strategy and select SPAW instead of TPAW. That will let you enter your own glide path and see the results.
Statistics: Posted by Ben Mathew — Fri May 31, 2024 12:54 am — Replies 767 — Views 221062