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What History Says About Safe Retirement-Withdrawal Rates

Timothy Strauts

When approaching retirement, the first question many investors ask is how much money they can safely take from their portfolio each year. A simplistic way of looking at this is a withdrawal rate, expressed as a percentage of your investment assets. To help you make that decision, it may be helpful to look at what previous retirees could have withdrawn over a long retirement.

The chart shows the historical maximum sustainable inflation-adjusted withdrawal rate over rolling 30-year periods for three hypothetical stock and bond portfolios from 1926–2014. In the portfolios, stocks are represented by the S&P 500 Index and bonds by an index of five-year U.S. Treasury bonds. Initial starting values for the three portfolios are assumed to be $500,000. Rolling period returns are a series of overlapping, contiguous periods. For example, the first point on the chart represents the rolling period of January 1926 to December 1955, the second point moves one month forward to the period February 1926 to January 1956, and so on.

As shown, the amount that could have been withdrawn over each 30-year period varied greatly. If you retired right after the stock market crash of 1929 or in the early 1980s at the beginning of a long 20-year bull market, you could have withdrawn over 10% and still not run out of money after 30 years.

On the other end of the spectrum if you retired at the beginning of a bear market, the maximum withdrawal rate was as low as three and a half percent.

Obviously, you don't know when you start retirement whether market returns will be good or bad, so most people pick a withdrawal rate near 4%, because it works most of the time.

While the chart models a fixed withdrawal rate for the entire period, we would advise people to use a more flexible strategy in practice.

When choosing the allocation of stocks and bonds, a portfolio with a higher stock allocation may make the most sense. You can see in the chart that a portfolio invested in 75% stocks is more volatile but has almost always paid off through higher maximum withdrawal rates.

In conclusion, investors should start retirement with a conservative withdrawal rate near 4% and make adjustments over time based on their income needs and portfolio performance. And investors should consider a portfolio with at least 50% equity allocation in retirement.