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By Timothy Strauts | 08-19-2014 01:00 PM

When Withdrawal Rates Could Be Higher

The timing of retirement amid the market cycle, as well as allocation to stocks, are key drivers for retirement withdrawal rates, says Morningstar's Tim Strauts.

Tim Strauts: In today's chart, we're going to look at maximum sustainable withdrawal rates over a 30-year retirement through the lens of three different portfolios, with the S&P 500 as the stock index and the five-year U.S. Treasury as the bond index.

When looking at the chart, you see a wide variability in maximum withdrawal rates, going from as high as 12%--which was only attainable if you had retired around 1932, right after the 1929 market crash, or in the early '80s at the beginning of a long 20-year bull market. A minimum withdrawal rate of 3% to 3.5% was only reached if you retired at the beginning of a bear market. And obviously, you don't know when you start retirement whether it's going to be a strong or weak market. So, that's why most people pick a withdrawal rate around 4%, because it works a great majority of the time.

When looking at the three portfolios, you can see that allocating a higher percentage to stocks does increase the volatility of your portfolio but has almost always paid off through higher maximum withdrawal rates.

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