Sustainable Retirement Withdrawals

Tezel, Ahmet
July 2004
Journal of Financial Planning;Jul2004, Vol. 17 Issue 7, p52
Academic Journal
• A typical approach to sustainability is to estimate the odds of running out of money (the probabilities of failure or shortfall) after assuming an initial withdrawal rate that remains constant throughout the payout period, Simulation (Monte Carlo simulation or bootstrapping) and overlapping historical periods are the primary methods for estimating the probability of failure for any portfolio containing different asset classes. • Based on the best timing portfolios from the long-term historical data, superior portfolios would have been those including large stocks with allocations ranging from 30 percent to 70 percent, small-stocks allocations ranging from 20 percent to 60 percent, and other securities allocations ranging from 10 percent to 20 percent. • The best portfolios include up to 15 percent intermediate and long-term bonds, 5 percent Treasury bills, and some small stocks. • With quarterly rebalancing and odds of running out of money at less than 8 percent, annual withdrawals of 4.5 percent, 5.5 percent, and 6.5 percent are sustainable over horizons of 30, 20, and 10 years respectively. • For larger real withdrawal rates, 95 percent to 100 percent of the portfolio must be invested in large and small stocks, with odds of failure greater than 10 percent. • There must be more flexibility to investors' spending plans in case of significant declines in the stock market if they wish to withdraw higher real amounts than indicated above.


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