John J Spitzer, Ph.D economics professor, Jeffrey C Stieter, Ph.D professor of marketing, and Sandeep Singh, Ph.D, CFA professor of finance, all professors at the State University of New York, Brockport, have challenged Bill Bengen’s and numerous other research of financial institutions, that a 4% withdrawal rate is over simplistic. Their research show that risk tolerance, asset allocation, withdrawal size, and expected returns should all be used to determine the best withdrawal rate. Their findings indicate that while 4% withdrawal rates on portfolios with 50% equity, and 50% fixed income may work as a “safe” withdrawal rate, investors can increase rates to 5.5% to 6% at the expense of a 25 to 30 percent chance of running out of money with stock allocations at 75 to 100%. A 4.4% withdrawal rate with the 50/50 mix had a 10 percent chance of running out of money. Most illustrations were run with a 30 year time horizon.
This author believes that 30 year time horizon’s are probable the biggest underestimated factor in determining whether or not someone is going to run out of money. While it may be a good figure now, to say that you can plan on living in retirement for 30 years, if you retire in your 50’s, or live well into your 90’s, 30 years income planning may not be enough. Constant monitoring of income withdrawal rates, portfolio allocations, and returns on a year to year basis, are going to give you a better chance of not outliving your money. Maintaining a fixed percentage when you’ve had 3 down years in a row may not be wise, particularly if you don’t need the income.
Withdrawal rates, like any other component of an equation, are just that, components of an equation. They may give guidelines, but should not be considered the be-all-end-all in setting up a living, breathing, financial plan with retirement income strategies. (Source: Journal of Financial Planning, October 2007)