REITs and Diversification in a Retirement Withdrawal Portfolio
Published: 2023-7-3
Journal: Journal of Real Estate Portfolio Management
Abstract
Abstract This study uses Monte Carlo simulation to examine the success of the monthly withdrawal of funds from portfolios consisting of U.S. large capitalization stocks, U.S. corporate bonds, and real estate investment trusts (REITs). The objective of this research is to provide an empirical examination of the effect of diversification with REITs on the withdrawal of funds from a retirement portfolio. We compare portfolios consisting of large capitalization stocks and corporate bonds to portfolios consisting of large capitalization stocks, corporate bonds, and REITs. We examine both portfolio compositions using a variety of portfolio weights, fund withdrawal rates, and fund withdrawal periods. The results of the study indicate that, in general, portfolios with REITs had a greater likelihood of sustaining a given number of withdrawals over this time. The results of this study can be used for retirement planning since they provide a historical perspective on the success of various withdrawal rates. Our results indicate that REITs, when added to a portfolio of stocks and bonds, can increase the success rates for a withdrawal portfolio. This indicates that individuals and large investment funds would likely benefit from adding REITs to a withdrawal portfolio of stocks and bonds. Keywords: REITs, Portfolio diversification, Retirement planning Acknowledgments We would also like to thank Martha Peyton, Michael Grupe, and Kimberly Goodwin for comments on a previous version of this paper. Notes 1. Although we begin with an arbitrary amount of $1,000,000, the sustainable withdrawal rate is the same for any beginning portfolio value since we are concerned with a percentage withdrawal. 2. Using the returns for large capitalization stocks and long-term corporate bonds from 1926–2021 instead of the returns from 1972–2021 produced success rates similar to other research in this area. Additional information Funding We would like to thank the Real Estate Research Institute (RERI) for financial support on the research.
Faculty Members
- Danny M. Ervin - Franklin P. Perdue School of Business, Salisbury University, Salisbury, MD, USA
- Joseph C. Smolira - School of Business, Belmont University, Nashville, TN, USA
Themes
- Impact of REITs on investment portfolios
- Success of fund withdrawals in retirement portfolios
- Diversification in retirement planning
- Empirical analysis of portfolio performance