Sufficient Income and Sustainable Withdrawal Rates for Retirement
DOI:
https://doi.org/10.58886/jfi.v20i1.2277Keywords:
Retirement Income, Sustainable Withdrawal Rates, Building Retirement PortfoliosAbstract
Since the passage of the Employee Retirement Income Security Act of 1974 (ERISA), numerous companies from throughout the United States have chosen to change from providing “Defined Benefit” pension plans to providing “Defined Contribution” pension plans. Successful retirement planning is an iterative process that requires the management of many variables. Some are random and unpredictable in scope and magnitude and others are choices we make as our retirement objectives change. It’s essential that changes be incorporated expeditiously to minimize adverse outcomes. One can begin the process by estimating the annual income required to support one’s “retirement lifestyle” if retirement occurred today. Then extrapolate that income to the planned retirement date based upon the expected rate of inflation. A “modified four percent rule” can then be used to estimate the portfolio value required to support 30 or more years in retirement. The financial planner and client should go through this process at least every two years or when major events suggest a change is required. To assist the planner, this paper extends the Four Percent Rule in the following ways: Time in retirement is 16 – 40 years in 2-year increments with an asset allocation range is 0% to 100% stocks in 15 equal steps.
References
Bengen, W. P. 1994. “Determining Withdrawal Rates Using Historical Data.” Journal of Financial Planning 7, 4 (October): 171-180.
Bengen, W. P. 1996. “Asset Allocation for a Lifetime.” Journal of Financial Planning 9, 4 (August): 58-67.
Bengen, W. P. 1997. “Conserving Client Portfolios During Retirement, Part III.” Journal of Financial Planning 10, 6 (December): 84-97.
Bengen, W. P. 2001. “Conserving Client Portfolios During Retirement, Part IV.” Journal of Financial Planning 14, 5 (May): 110-119.
Bengen, William P. 2016. “Is 4.5 % Still Safe?” Financial Advisor (June): 1-3.
Bierwirth, L. 1994. “Investing for Retirement: Using the Past to Model the Future.” Journal of Financial Planning 7, 1 (January): 14-24.
Blanchett, D. M. 2017, “The Impact of Guaranteed Income and Dynamic Withdrawals on Safe Initial Withdrawal Rates.” Journal of Financial Planning, 30 (4), pp: 42–52.
Blanchett, David M.; Cormier, Warren, 2021. “Right-sizing Retirement: Exploring the Retirement Consumption Gap in Early Retirement.” Journal of Financial Planning, 34, 2, 68-81.
Blanchett, D., and L. Frank. 2009. “A Dynamic and Adaptive Approach to Distribution Planning and Monitoring.” Journal of Financial Planning 22, 4 (April): 52-66.
Cooley, P. L., C. Hubbard and D. Walz. 1998. “Retirement Spending: Choosing a Sustainable Withdrawal Rate.” Journal of the American Association of Individual Investors 20, 2 (February): 16-21.
Cooley, P. L., C. Hubbard and D. Walz. 1999. “Sustainable Withdrawal Rates from Your Retirement Portfolio.” Financial Counseling and Planning 10, 1:39-47.
Cooley, P. L., C. Hubbard and D. Walz. 2001. “Withdrawing Money from Your Retirement Portfolio Without Going Broke.” Journal of Retirement Planning 4: 35-41, 48.
Cooley, P. L., C. Hubbard and D. Walz. 2003a “A Comparative Analysis of Retirement Portfolio Success Rates: Simulation Versus Overlapping Periods.” Financial Services Review 12, 2: 115-128.
Cooley, P. L., C. Hubbard and D. Walz. 2005. “Retirement Withdrawals: What Rate is Safe When Time is Short and Uncertain?” Journal of the American Association of Individual Investors 27, 1 (January): 4-9.
Delorme, Luke. 2015. “A Blueprint for Retirement Spending.” Journal of Financial Planning, 28, 9, p40-50,
Frank, L. and D. Blanchett. 2010. “The Dynamic Implications of Sequence Risk on a Distribution Portfolio.” Journal of Financial Planning 23, 6 (June): 52-61.
Gardner, G. and Pittman, S., 2013, “Measuring the Risk of Running Out of Money in Retirement,” Journal of Financial Planning, 26 (12), pp. 38-44.
Guyton, J. 2004. “Decision Rules and Portfolio Management for Retirees: Is the ‘Safe’ Initial Withdrawal Rate Too Safe?” Journal of Financial Planning 17, 10 (October): 54-62.
Ibbotson, Roger, Stocks, Bonds, Bills, and Inflation Yearbook, Various editions, Wiley.
Liu, Q., R. Chang, J. De Jong Jr. and J. Robinson. 2009. “Reality Check: The Implications of Applying Sustainable Withdrawal Rate Analysis to Real World Portfolios.” Financial Services Review 18 (Fall): 123-139.
Marwood, D. and Minnen, D, 2020, “Safely Boosting Retirement Income by Harmonizing Drawdown Paths,” Journal of Financial Planning, 33 (11), pp. 46-60.
Miller, Andrew. 2016. “Improving Withdrawal Rates in a Low-Yield World.” Journal of Financial Planning 29 (4): 52-58.
Pye, G. B. 2000. “Sustainable Investment Withdrawals.” Journal of Portfolio Management 26, 4 (Summer): 73-83. DOI: https://doi.org/10.3905/jpm.2000.319765
Schwab, Charles, 2015, http://www.schwab.com/public/schwab/nn/articles/How-Much-Should-You-Be-Saving, April 29.
Spitzer, J., J. Streiter and S. Singh. 2007. “Guidelines for Withdrawal Rates and Portfolio Safety During Retirement.” Journal of Financial Planning 20, 10 (October): 52-59.
Stout, R. 2008. “Stochastic Optimization of Retirement Portfolio Asset Allocations and Withdrawals.” Financial Services Review 17, 1 (Spring): 1-15.
Waggle, D., Moon, G., and Lee, H., 2022, “Retirement Glide Path Options in an Uncertain, Low-Interest-Rate Environment," Journal of Financial Planning, 35 (3), pp, 68–88.
