Crunching the Retirement Numbers

The questions are crucial for anyone entering retirement: How much can I afford to withdraw from my portfolio during retirement without exhausting my money prematurely? What percentage of my assets is safe to take from my portfolio each year?

Fortunately, these are the kinds of questions that have been studied extensively. And the latest research has found that the optimal withdrawal rate to maintain throughout 30 years worth of retirement is somewhere between 3 and 6 percent. While each person’s optimal figure will vary depending on such factors as asset allocation and rebalancing, right around 4 percent assuming a 30-year time horizon appears to be the ideal withdrawal rate when using a portfolio made up of two asset classes, with 65 percent invested in large-company stocks and 35 percent invested in five-year Treasury notes, and rebalanced at the end of each calendar year.

That rate can change, however, depending on the number of asset classes used in a portfolio. For instance, a portfolio made up of three asset classes, with 20 percent invested in small-company stocks, 45 percent invested in large-company stocks and 35 percent in five-year Treasury notes, will produce an optimal withdrawal rate of nearly 4.4 percent. That increases the optimal withdrawal rate by about 0.25 percent, which can make a real difference over the long haul. Investors with a high risk tolerance who want to increase withdrawals may consider increasing the percentage invested in stocks. However, in a prolonged recessionary period, increasing equity exposure may actually reduce the optimal withdrawal rate and should be done only after careful analysis.

Changing Horizons

Research shows ways for investors to modify their asset allocations. Not surprisingly, the best withdrawal rate increases as the time horizon shortens. For instance, the peak for a person with a 10-year time horizon is almost 9 percent, about twice that for a person with a 30-year time horizon. The percentage that a person allocates to large-company stocks also declines as the time horizon shortens. For instance, individuals with time horizons of about 15 to 20 years may optimize their withdrawal rate by reducing their equity allocation to less than 60 percent. The exact allocation will vary depending on the time frame and withdrawal rate.

For tax-deferred accounts, an increase of one percentage point in the initial withdrawal rate reduces by 15 to 20 percent the probability that a portfolio will last 30 years. An initial withdrawal rate increase of two percentage points results in just a 55 to 60 percent success rate. For taxable accounts, the results are slightly different. An increase of one percentage point in the initial withdrawal rate produces a success rate of roughly 85 to 90 percent, and an increase of two percentage points results in a 70 percent success rate. The bottom line is that some individuals may want to trade off a higher initial withdrawal rate for the near certainty of their portfolios lasting as long as their time horizon goals.

If investors want to find ways to marginally increase those optimal withdrawal rates, they could employ a formal rebalancing strategy, modify their asset allocation, utilize mutual funds that have lower costs or hire a wealth manager to monitor these things for them. For example, allocations that contain an optimal mix of stocks and bonds, domestic and international stocks, value and growth stocks, and small—and large-company stocks may allow investors to improve their optimal withdrawal rate by more than 0.50 percent.

The Latest Research

We are always on the lookout for information that can help you. These are the kinds of findings we are always looking for here at Bernhardt Wealth Management research that can help us better construct your portfolio to meet your financial goals. As advanced as the field of investment management is, there is always a place for new findings.

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