### Safe Retirement Withdrawal Rate?

**February 21, 2013** - Strategic Allocation

In the current environment of low bond yields, what is a safe investment withdrawal rate during retirement? In their January 2013 paper entitled “The 4% Rule is Not Safe in a Low-Yield World”, Michael Finke, Wade Pfau and David Blanchett model the risk of exhausting wealth for different retirement durations, withdrawal rates, stocks-bonds portfolio mixes and assumptions about future market conditions (stock and bond returns). They model retirement portfolio dynamics via Monte Carlo simulations applied to log-normal return distributions, based on an inflation-adjusted withdrawal rate set at a percentage of investment portfolio value at retirement and annual rebalancing to a target asset allocation (with failure whenever a withdrawal results in a zero balance). They assume withdrawals cover any taxes due and ignore any portfolio fees/frictions. They focus on a 30-year retirement under current market conditions, with bonds yielding an average annual real return of -1.4% (based on current yields for 5-year Treasury Inflation-Protected Securities) and stocks yielding an average annual real return of 4.6% (6.0% equity risk premium over the bond yield). They also consider a case based on 1926-2011 average annual real returns of 2.6% for bonds and 8.6% for stocks, and cases for which current low returns revert to historical averages five or ten years into retirement. Using the specified modeling assumptions and parameters, *they find that:* Keep Reading