Monday, October 24, 2011

20-Year Sustainable Withdrawal Rates for US and Japan

As a part of the interesting discussion taking place at Todd Tresidder's Financial Mentor website about his new article called, "Are Safe Withdrawal Rates Really Safe?", John Gay asks:

Author: John Gay
@Wade, @Michael, @Rob:  Does anyone have details on the specifics of Japan's last 30 years or so in this context?  ie,  a 50/50 portfolio (or similar) invested in Japan's stock and bond markets (in yen) at their peak (or earlier if not enough data points) allowed a ??% withdrawal rate (in the same context as this discussion).  Curious to see the outcome and how much deflation offset poor stock performance, how bonds helped (or didn't), etc.  @Wade I know your research includes multiple countries but wasn't sure if you have isolated Japan (forgive me if I missed it).

Here is my attempt to provide a quick general answer about this.

First, since Japan's bubble burst starting around 1990, we don't yet have enough data to see the 30-year sustainable withdrawal rate for someone retiring at the start of the downturn.

So for here, I will consider 20-year sustainable withdrawal rates instead.  They tend to be higher than 30-year rates, naturally.  To give some context for comparison, here is the time path of maximum sustainable withdrawal rates for US retirees over 20-year periods, along with the asset allocation supporting this:

And here is Japan's case.  Interestingly, for fixed 20-year asset allocations, Japanese retirees would be best served by abandoning stocks if they retired in the late 1980s.

And finally, here is the time path of these 20-year withdrawal rates for both Americans and Japanese using a fixed 50-50 asset allocation of stocks and bonds.

For Japanese retiring at the start of the Lost Decades, withdrawal rates get low, but didn't fall as low as at various times in the past.  Deflation must have helped a bit.  The withdrawal rates were lower for the American retirees in the 1960s who faced intense inflation after their retirements.  This does leave some hope for recent US retirees, as if inflation can remain low, it could help support higher withdrawal rates than I find with my predictions in the "Can We Predict the Sustainable Withdrawal Rate for New Retirees?" paper. I did list this "inflation issue" as a caveat in my paper. In Todd's article, he doesn't seem particularly optimistic about the prospects for inflation remaining low though.


  1. Excellent. Thanks Wade. Scary drop for Japanese retirees in the 30's-40's.

  2. I think this can be blamed on inflation coming at the end of World War II:

    column 1: year, column 2: Inflation Rate
    1944.00 17.91
    1945.00 171.39
    1946.00 361.29
    1947.00 180.06
    1948.00 62.06

    Real returns just couldn't keep up:

    column 1: year
    column 2: real stock return
    column 3: real bond return
    column 4: real bill return

    1944.00 -11.04 -11.85 -12.36
    1945.00 -63.06 -61.00 -61.92
    1946.00 -85.52 -77.51 -77.52
    1947.00 -45.95 -62.95 -62.60
    1948.00 25.12 -57.30 -35.26