Determining Withdrawal Rates Using Historical Data

Bengen, William P.
March 2004
Journal of Financial Planning;Mar2004, Vol. 17 Issue 3, p64
Academic Journal
Using the concept of portfolio longevity, this article present techniques that planners can use in their practice of advising clients how much they can safely withdraw annually from retirement accounts. Following are the three largest stock-market declines since 1926 that have occurred over periods of more than one year. The Big Bang of the 1973-1974 recession was the most devastating because it occurred during a period of high inflation. Not only did investors suffer large paper losses in their portfolios, but the purchasing power of what remained was reduced substantially. The Big Dipper of 1937-1941 featured a stock decline, but it occurred during a period of moderate inflation and somewhat higher bond returns. Therefore, its impact on portfolios was not as severe, though it was still substantial. The Little Dipper was the early Depression years. As expected, increasing the percentage of stocks in a portfolio only increases the damage in such an event. As a result, there is an increased chance of experiencing a retirement with near-minimum portfolio longevity. As there is a trade-off in moving to stock allocations higher than 50 percent, there is clearly room for client discretion. INSET: Editor's note.


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