The Sustainable Withdrawal Rate (“SWR”) will depend on the individual retiree’s situation, including:
- Anticipated years in retirement
- Desire for increased longevity protection
- Desire to leave money to heirs
- Portfolio mix (stocks, bonds, cash)
- Risk Tolerance (desire for higher/lower success rate)
In a well-known 1994 study, William Bengen found a 4% SWR survived all historical scenarios starting from 1926 to 1976. In the later Trinity Study, done in 1998, a 4% SWR had 95% success rate. This lower success rate was affected by the use of corporate bonds instead of Treasury notes (in a period with some large corporate bond defaults).
In 2013, a study by Finke, Pfau and Blanchett calculated the SWR based on Monte Carlo simulations*, assuming 2.6% real bond returns and 8.6% real stock returns. With this new analysis, they found a 4% withdrawal rate succeeds 94% of the time with a similar 50/50 stock/bond split over a 30-year investment period.
- A 4% withdrawal rate succeeds 75% of the time with a 100% allocation to stocks for 30 years
- A 4% withdrawal rate succeeds 73% of the time with a 75/25 stock/bond split for 30 years
- A 4% withdrawal rate succeeds 64% of the time with a 50/50 stock/bond split for 30 years
- Delay retirement until you have a bigger retirement account.
- Use a lower withdrawal rate.
- Increase the equity percentage of your portfolio (more volatility).
- Accept a lower probability of living off your portfolio until you die, or lower probability of leaving money to heirs.
- Trade off withdrawing more now and less in thefuture
- Increase stock allocation after a big market drop.
- Use a ratcheting strategy: If your portfolio value increases to 50% above the beginning level, increase your spending by 10%. Revisit every 3 years.
- Call us!
Here’s to a successful retirement!
*A Monte Carlo simulation performs risk analysis by building models of possible results by substituting a range of values—a probability distribution—for any factor that has inherent uncertainty. It then calculates results over and over, each time using a different set of random values from the probability functions.
Nothing contained herein is intended to be a formal research report, or as a source of any specific investment recommendations and makes no implied or express recommendations concerning the manner in which any specific accounts should be handled. Any opinions expressed in this material are only current opinions and while the information contained is believed to be reliable there is no representation that it is accurate or complete and it should not be relied upon as such. Investing involves risk, including loss of principal, and no assurance can be given that a specific investment objective will be achieved.