Guidelines for Withdrawal Rates and Portfolio Safety During Retirement

Journal of Financial Planning: October 2007

Executive Summury

• The existing literature for retirement portfolio withdrawal rates suggests that a real withdrawal rate of 4 percent of the initial portfolio is “safe.” But this paper demonstrates that a blanket “4 percent withdrawal” rule may be an oversimplification of a complex set of circumstances.
• Risk tolerance, asset allocation, withdrawal size, and expected returns all affect the process of withdrawing from a retirement portfolio. To advance previous research, this paper uses 21 stock/bond allocations and 71 withdrawal rates, for 1,491 possible combinations. For each of these combinations, 10,000 bootstrap iterations are run for 30-year periods.
• Results show that withdrawals rates as high as 5.5 to 6 percent can be achieved, but only at a 25 to 30 percent chance of running out of money and with stock allocations 75 to 100 percent. A 4.4 percent withdrawal rate with a 50/50 bond/stock allocation has a 10 percent chance of running out of money.
• To visually illustrate the results for clients, the paper develops easy-tounderstand withdrawal contours, runout contours, and balance remaining contours that clearly reveal the relationship between asset allocation, withdrawal rates, the chance of running out of money, and estate building. First, given a tolerance for the chance of running out of money, the largest amount that can be withdrawn can be determined. Second, the contours can be used to provide the client’s optimal asset allocation for a fixed withdrawal rate and a given tolerance for running out of money. Third, the withdrawal amount at various levels of tolerance for running out of money can be determined while holding the asset mix constant.

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