Safe Withdrawal Rates

Exceptional thought-provoking #retirement research by the Morningstar Team of Christine Benz Tao Guo, Ph.D., CFP®, CFA® Amy Arnott Jason Kephart, CFA. Yes, I read all 48 pages, and once you get past the 3.7% "safe withdrawal" rate (where over 30 years, starting w $1M, you have a 90% probability of spending $1.1M & having an ending balance of $2.44M) there are many different factors to consider to get to your personal spending rate. Deciding how to spend hard-earned savings at retirement ("decumulation") is HARD, and how much you can realistically spend "depends." Do you want to leave money to heirs, or do you prefer to spend it all? Are you willing to be aggressive w equity exposure (and the volatility that comes with it)? Do you have a pension or an annuity? Will you spend the same amount every year in retirement? So many factors to consider....but roughly the 4% rule holds (even though it was 3.3% in 21, 3.8% in 22, 4.0% in 23, and 3.7% this year). Interesting facts: *If you used long-term historical returns for each asset class rather than MIMs's forward-looking conservative projections, you could increase the safe withdrawal rate to 5.5% for a 50/50 portfolio or 5.7% for a 60/40 portfolio. *You could use actual retiree spending patterns (David Blanchett shout-out) where spending levels off in the middle to later years to achieve a 4.8% spending rate. *EBRI research shows inflation-adjusted spending historically falls 19% from age 65-75, 34% from 65 to 85, and 52% from 65 to 95 (then could spike due to end-of-life health care expenses) *Or you could adjust withdrawal rates every year based on market conditions. I am not a fan of this approach as my dad retired in Q1 2008, and everything looked great - but by May of 2009, he was down 52% and wanted to move to all cash, which would have been a complete disaster. We need to consider investor behavior & behavioral finance. On the other hand, my mom will not spend one penny more than her RMD because she fears running out of money. *Social security and guaranteed lifetime income (annuity) can significantly impact how you spend - and again, you have many choices that will determine how much you can safely spend. As I begin to think how we will handle spending in retirement, I am glad there are new innovative in-plan solutions like Income America, LLC available. #401k #fiduciary #fintech #retirementincome https://lnkd.in/gK9xnaAg

The 4% Rule: What You Need to Know for a Safe Retirement Withdrawal Strategy The Trinity Study is a widely cited research in personal finance and retirement planning. It was conducted by three professors from Trinity University in 1998, and the study analysed historical stock and bond returns to determine a "safe withdrawal rate" for retirees from their investment portfolios. The main goal of the study was to find out how much retirees could safely withdraw from their portfolios each year without running out of money. The study focused on periods of 30 years and concluded that a 4% withdrawal rate was generally safe, meaning retirees could withdraw 4% of their portfolio in the first year of retirement, adjust the amount for inflation each year, and have a high likelihood of not depleting their funds over 30 years. Key Concepts of the Trinity Study: Safe Withdrawal Rate (SWR): The percentage of the portfolio a retiree can withdraw annually without running out of funds. Asset Allocation: The mix of stocks and bonds in a portfolio impacts its longevity and the safe withdrawal rate. Success Rate: The probability of a retiree’s portfolio lasting through their retirement period. A 4% withdrawal rate typically provided success rates over 90% in the study. Updated Insights Since the original study, the financial landscape has changed with lower bond yields and fluctuating stock markets. Some analysts argue that a 3.5% or even 3% withdrawal rate might be more appropriate in today’s market to provide more safety, especially given longer life expectancies and economic volatility. Example Scenarios: Scenario 1: A retiree has a $1 million portfolio, split 60% in stocks and 40% in bonds. With a 4% withdrawal rate, they would take out $40,000 in the first year of retirement. Each year, they would adjust the amount withdrawn for inflation. Scenario 2: If the same retiree chooses a more conservative 3% withdrawal rate, they would take out $30,000 in the first year but would likely reduce the risk of running out of money over a longer retirement period. Here is the graphical representation of success rates for different portfolio allocations and the 4% withdrawal rate. This graph (below) can be useful in illustrating the varying levels of risk depending on the mix of stocks and bonds in a retirement portfolio. Conclusion For individuals planning their retirement, the Trinity Study offers valuable insights into how much you can safely withdraw from your portfolio without running out of money. A 4% withdrawal rate has been historically effective, but in today’s low-interest environment, some experts suggest being more conservative, aiming for 3%–3.5% to account for increased longevity and market volatility. The study highlights the importance of having a balanced portfolio of stocks and bonds, where the right mix can significantly increase the probability of your savings lasting through retirement.

In previous posts we've identifed the ten variables which affect SAFEMAX- the maximum safe withdrawal rate of our personal retirement withdrawal plan. It's time to put all the factors together and create a sample plan. Creating a withdrawal plan is accomplished in three straightforward steps: 1. Select options for each of the eight Elements 2. Determine both the current Shiller CAPE and inflation regime, and use them to select SAFEMAX (from the SAFEMAX Finder tables) 3. Create a template chart as a measuring stick for your plan. Table 12.1 shows the choices for the eight Elements made by our hypothetical retiree. I refer to this combination of the Elements as "the standard configuration." I use this combination most frequently in writing about my research, and they form the backdrop for the "4.7% Rule." Although each of the eight Elements can be customized, there are no surprising choices here. The retiree has opted for a 30-year planning horizon, withdrawals from a tax-advantaged account, no legacy, a conventional asset allocation, etc. Table 12.2 shows the value of inflation and the Shiller CAPE used by the retiree for their plan. The SHiller CAPE statistics can be found the internet. Inflation is an estimate of CPI over the first ten years of retirement: low (0% to 2.5%), moderate (2.5% to 5.0%), or high (greater than 5.0%.) Estimating inflation is probably the toughest part of creating a withdrawal plan, and may result in adjustments to the plan in later retirement. Note that the retiree has chosen an inflation rate of 3.5% for their plan (moderate inflation regime.) They also retired into a relatively cheap stock market, with a Shiller CAPE of 14.8. The long-term average is a tad over 17. Ignore the "source of data" row for now; it will gain meaning in the next installment. Consulting the "SAFEMAX Finder" table 2.3 we used in the last installment (see below), we find that a Shiller CAPE of 14.8 corresponds to a SAFEMAX of 7.24%. This is the initial withdrawal rate the retiree will use in their plan. This is slightly above the 100-year average of 7.1%. To complete the plan, create a hypothetical Current Withdrawal Rate (CWR) template, which can be used to benchmark the plan's performance annually (see Fig 12.2). CWR is simply the dollar withdrawal made each year divided by the portfolio value at the beginning of the year. In a typical plan, CWR will range from the SAFEMAX in year 1 to 100% in the last year of the horizon. The chart is created using the selected IWR of 7.24%, 3.5% inflation every year, average long-term investment returns for all the asset classes in the portfolio, and an adjustment to make the chart reach a zero legacy value at the end. The personal retirement withdrawal plan is now complete. It consists of Table 12.1, Table 12.2, and Figure 12.2. In the next installment, we'll test this plan against a hypothetical market environment and see how it holds up. Yours for a Richer Retirement, Bill Bengen

In 1994, William Bengen published groundbreaking research that reshaped the way retirees approach their income planning. He introduced the 4% rule, which suggests that retirees can safely withdraw 4% of their portfolio in the first year of retirement and then adjust that amount annually for inflation. This strategy is designed to help retirees sustain their savings and avoid running out of money over a 30-year retirement. Thirty-one years later, Bengen—whose upcoming book, A Richer Retirement: Supercharging the 4% Rule to Spend More and Enjoy More, is set to be published later this year—now believes retirees can safely withdraw 4.7% of their portfolio in the first year of retirement, up from his original 4% rule, while still ensuring their savings last for 30 years. However, before retirees blindly follow Bengen’s rule of thumb, he outlined eight key factors to consider when crafting a retirement income plan in a recent episode of Decoding Retirement. https://lnkd.in/eFJTxBBJ via Yahoo Finance

The 4% "Rule" - it's a useful directional guideline, but not a recommended withdrawal strategy for actual retirees (in my opinion). The goal of William (Bill) Bengen's 1994 study was to: 1. Determine the maximum safe withdrawal rate (as a % of the initial portfolio value), 2. Establish a stock/bond asset allocation range that holds up across nearly all historical retirement scenarios (early 1900s to 1992), 3. Provide guidance on mid-retirement changes to asset allocation and withdrawal rates, and 4. Share Bill's own approach to advising clients (at that time). The study focuses on the impact of sequence of returns and inflation risk, rather than relying on long-term average returns and inflation rates - which makes sense. BUT The study explicitly isolates the portfolio, excluding Social Security and other variable sources of retirement income, and assumes living expenses are static throughout retirement. While it may be helpful (psychologically) to assume your portfolio is your only source of retirement income, that's a conservative assumption (stacked on top of the 4% worst-case withdrawal guideline). Within the FI community, we often add even more layers of conservative assumptions to feel safer as we approach retirement. But this tendency can lead to underspending/giving and unintentionally reducing the (unique) life we worked long and hard to build. What to consider instead: 1. Use retirement cash flow projection software (there are a handful) to visualize your portfolio alongside variable sources of income and expenses. 2. Recognize that your spending will likely change over time, especially in response to events outside of your control. 3. Consider the flexibility you have to adjust your retirement spending, including the ability to differentiate between nondiscretionary and discretionary spending. 4. Avoid all-or-nothing thinking on the path to and through retirement. 5. Continue your learning while being aware of cognitive biases and the desire to feel safe and secure (which shouldn't be ignored).