Optimal Asset Allocation, Asset Location and Drawdown in Retirement
Executive Summary
- This paper investigates how differences in tax treatment across asset classes and investment accounts affect retiree behavior, including desired asset allocations and the location and timing of withdrawals.
- We find that the distribution of wealth across accounts does not materially affect the aggregate asset allocation.
- However, asset location – the allocation within each account – is highly dependent on the tax treatment of each account.
- Despite lower tax rates on equities, retirees should consider holding more stocks in tax-deferred accounts to maximize their tax benefits.
- Retirees may be able to optimize after-tax income with allocations to muni bonds in their taxable accounts.
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Disclosures
The "risk-free rate” can be considered the return on an investment that, in theory, carries no risk. Therefore, it is implied that any additional risk should be rewarded with additional return. All investments contain risk and may lose value.
The models, scenarios and decisions included here are not based on any particular financial situation, or need, and are not intended to be, and should not be construed as a forecast, research, investment advice or a recommendation for any specific PIMCO or other strategy, product or service. Individuals should consult with their own financial advisors to determine the most appropriate allocations for their financial situation, including their investment objectives, time frame, risk tolerance, savings and other investments.
The analysis contained in this paper is based on hypothetical modeling.No representation is being made that any account, product, or strategy will or is likely to achieve profits, losses, or results similar to those shown. Hypothetical or simulated performance results have several inherent limitations. Unlike an actual performance record, simulated results do not represent actual performance and are generally prepared with the benefit of hindsight. There are frequently sharp differences between simulated performance results and the actual results subsequently achieved by any particular account, product, or strategy. In addition, since trades have not actually been executed, simulated results cannot account for the impact of certain market risks such as lack of liquidity. There are numerous other factors related to the markets in general or the implementation of any specific investment strategy, which cannot be fully accounted for in the preparation of simulated results and all of which can adversely affect actual results.
Return assumptions are for illustrative purposes only and are not a prediction or a projection of return. Return assumption is an estimate of what investments may earn on average over the long term. Actual returns may be higher or lower than those shown and may vary substantially over shorter time periods.
Figures are provided for illustrative purposes and are not indicative of the past or future performance of any PIMCO product.
Past performance is not a guarantee or a reliable indicator of future results.
Investing in the bond market is subject to risks, including market, interest rate, issuer, credit, inflation risk, and liquidity risk. The value of most bonds and bond strategies are impacted by changes in interest rates. Bonds and bond strategies with longer durations tend to be more sensitive and volatile than those with shorter durations; bond prices generally fall as interest rates rise, and low interest rate environments increase this risk. Reductions in bond counterparty capacity may contribute to decreased market liquidity and increased price volatility. Bond investments may be worth more or less than the original cost when redeemed. Income from municipal bonds is exempt from federal income tax and may be subject to state and local taxes and at times the alternative minimum tax. Equities may decline in value due to both real and perceived general market, economic and industry conditions.
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CMR2019-1030-422039