The SAFE Retirement Withdrawal Rate! Help Retires To Not Outlive Their Income! Sell Annuities!
Do you help retirees and sell annuities and investments? Then you need to make sure you give them the best advice! Is there a safe retirement withdrawal rate for seniors when they retire?
The SAFE Retirement Withdrawal Rate…
One of the questions most retirees ask is… “How much can I safely withdraw per year from my retirement account?” They ask that because if they retire at age 65… they could need their retirement income to last for 25-30 years or more. So, if they use the wrong retirement withdrawal rate it could mean they will run out of money! And then they will have to go back to work! Or they will be forced to move in with their children.
There is not a great deal of research in this area. Because most of the research is on how to accumulate money, and not how much you can spend. There have been only a few studies on a safe retirement withdrawal rate.
Most of the studies use data from Ibottson Associates! They use the returns from stocks, bonds, and cash since 1926 as the basis for their analysis. Even though the average annual rate of return over the past 80 years for the S&P 500 is about 9%, you cannot withdraw an amount close to that. Because of inflation and the ups and downs of the stock market.
Safe Retirement Withdrawal Rate Studies…
The Bengen Study
On February 25, 1997, Wall Street Journal columnist Jonathan Clements reported on a study by financial planner William Bengen. He looked at year-by-year returns since 1925 for a 50/50 stock/bond portfolio. He assumed half the portfolio was in the S&P 500 and half in intermediate-term government bonds. Using a 30-year holding period… He calculated that a 4.1% withdrawal rate would allow retirees to survive the worst market declines.
The Harvard Study
In 1973, Harvard University did a study to determine how much they could safely withdraw from their endowment fund… without using the principal. Assuming a portfolio of 50% stocks and bonds and cash, Harvard’s analysts calculated they could withdraw 4% in the first year. And then adjust the subsequent year’s withdrawals for inflation. For example, if there was 10% inflation, the second year’s withdrawal would be 4.4% of the initial portfolio value.
The Trinity Study
Dallas Morning News columnist Scott Burns has written extensively on a “safe” withdrawal study by three Trinity University researchers. The Trinity Study measures the “success rate” of various portfolios from 1926 to 1995. The “success rate” is the percent of the time a retiree could sustain a given withdrawal rate… without depleting his retirement assets. One portion of the Trinity study adjusted withdrawals for inflation/deflation, much like the Harvard study. This analysis showed that of the portfolios considered, the optimal asset mix is 75% stock/25% long-term corporate bonds. For a 30-year payout period and a 4% withdrawal rate, this mix had a 98% success rate. At a 3% withdrawal rate, the 75/25 mix had a 100% success rate. Interpolating these results would give you a “safe” withdrawal rate of slightly less than 4%. Which is virtually identical to the Harvard study.
Safe retirement withdrawal rate summary!
The consensus seems to be about 4% per year. But how should people interpret those studies? The first thing to consider is that these studies are based on investment returns before expenses. So if you pay an investment advisor an annual fee of 2% of assets… And he has you invested in no-load mutual funds with a 0.5% expense ratio, then your annual expenses are 2.5%. So your “safe” withdrawal rate is 4.0% – 2.5% = 1.5%
Another consideration is that most of these studies are based on historical data. The fine print here should read “past performance does not guarantee future results.” While there is every reason to believe that investment returns in the next 80 years will be similar to the previous 80 years. There is little chance it will be EXACTLY the same. To say that 4.0% is a “safe” withdrawal rate and that 4.1% will leave you broke… Implies a measure of accuracy in the forecast that just is not there. It may make more sense to say that the safe retirement withdrawal rate going forward… Lies somewhere in the range of 3.25% to 4.25%. Fewer management fees and expenses
The Best Retirement Income Option!
When you consider the above studies, annual management fees, income taxes… then the historical annual returns of annuities. What is the justification to put a retiree’s income assets at risk in the stock market?
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