Stochastic optimization of retirement portfolio asset allocations and withdrawals

Stochastic optimization identifies the asset allocation that minimizes the probability of exhausting the retirement portfolio, thereby minimizing risk, from unmanaged (constant) and optimally managed withdrawals over the retirement life span. Optimal equity compositions and minimized probabilities of prematurely exhausting the portfolio increase with higher withdrawal rates and earlier retirements with both managed and unmanaged withdrawals. However, optimal withdrawal management from optimally managed portfolios reduces the sensitivity of premature portfolio exhaustion to higher initial withdrawal rates or earlier retirements, thereby reducing the increase in the risk of exhausting the portfolio necessary to support the improved lifestyles from higher withdrawals, longer retirements, or both.