Monday, June 20, 2011

Sustainability of a 10% Withdrawal Rate in Retirement

The 4% Rule for Retirement Withdrawal Rates suggests that you can withdraw 4% of your assets at retirement and adjust this monetary amount for inflation in subsequent years in a sustainable manner for at least 30 years.  This does not mean you withdraw 4% of your assets each year after retirement.  4% only applies to the first year.  In subsequent years, your "current withdrawal rate" is different if the returns on your remaining portfolio assets do not precisely match the amount you withdrew so that your remaining portfolio amount differs from your initial wealth at retirement.

Based on an earlier discussion about current withdrawal rates, I didn't state this, but I started thinking that perhaps a good rule of thumb is to reduce your expenditures whenever your current withdrawal rate exceeds 10%, at least if you are hoping to continue spending from your assets for a long enough period of time.  This blog post doesn't provide any answers, just a brief exploration about how far you could have gotten historically from a point where you have a 10% current withdrawal rate.

It is based on the standard SBBI data (in annual terms) since 1926 for a portfolio of 60% large-cap stocks and 40% intermediate-term government bonds.  This first figure shows how many years before you run out of wealth with the 10% initial withdrawal rate.

In the worst-case from history since 1926, you ran out of wealth in the 8th year.  Then, in 9 cases, which includes a retiree at the start of 2000, you ran out of wealth in the 9th year.  You can see the rest of the cases in the figure.  One retiree even made it to the 25th year before running out of wealth.  And, as the next figure will show, we don't know yet when the 1982 retiree will run out of wealth, but was still going strong after 28 years which is the most I can check with data through the end of 2009.

This figure shows the actual current withdrawal rate in each subsequent year for an initial withdrawal rate of 10%.  The previous bar graph was based on the red squares where the current withdrawal rate increased to 100%, which means that the remaining wealth was exhausted.