Decision Rules and Portfolio Management for Retirees: Is the 'Safe' Initial Withdrawal Rate Too Safe?

Guyton, Jonathan T.
October 2004
Journal of Financial Planning;Oct2004, Vol. 17 Issue 10, p54
Academic Journal
This paper establishes new guidelines for determining the maximum "safe" initial withdrawal rate, defined as (1) never requiring a reduction in withdrawals from any previous year, (2) allowing for systematic increases to offset inflation, and (3) maintaining the portfolio for at least 40 years. It evaluates the maximum safe initial withdrawal rate during the extreme period from 1973 to 2003 that included two severe bear markets and a prolonged early period of abnormally high inflation. It tests the performance of balanced multi-asset class portfolios that utilize six distinct equity categories: U.S. Large Value, U.S. Large Growth, U.S. Small Value, U.S. Small Growth, International Stocks, and Real Estate. Two portfolios (65 percent equity and 80 percent equity) are evaluated in conjunction with systematic Decision Rules that govern portfolio management, sources of annual income withdrawals, impact of years with investment losses and withdrawal increases to offset ongoing inflation. This paper finds that applying these Decision Rules produces a maximum "safe" initial withdrawal rate as high as 5.8 percent to 6.2 percent depending on the percentage of the portfolio that is allocated to equities.


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