Debunking the Myth on Withdrawal Rates

The investment community continues to debate what an appropriate sustainable withdrawal rate is for an investment portfolio. Simply put, the withdrawal rate is the amount of money you can pull from your savings in one year.  While withdrawal rates have fluctuated over the years, 4% seems to be the common rate today.

People like quick fixes so the industry constantly publishes and discusses the magic number. This can give individuals a false sense of security, possibly giving them license to avoid doing actual financial planning. We believe that a safe withdrawal rate is 0% — that is to never withdraw any principle from your investments.  The problem is that safe or guaranteed income is not easy to come by.  In order to live off of interest alone, you need a very large investment balance that most people are not able to accumulate.

The reality today is that a 10-year US Treasury Bond is only paying you around 2% and that income is fully taxable.  Even if you invest in a long-term fixed-rate annuity (giving up substantial liquidity), you are going to be hard-pressed to earn more than 3% per year.  Most investors need to earn a greater return on their investments to meet their goals and live their best lives.

In 2012, BlackRock, Inc conducted a market simulation comparing withdrawal rates and what the chance was of having your assets last through your retirement. Their model showed that you will have a 13-18% chance of running out of money if you withdraw assets at a 4% rate over 30 years. Today, a 65 year old woman has a 10% chance of living to age 100 and longevity will improve in the future. With market simulations going out only 30 years, there is a good chance that you’ll outlive your money. So what can people do?

Historically, a 50/50 stock and bond portfolio has provided enough income and enough return to meet a 4-5% withdrawal rate – which is probably why many still cling to this idea. Let me show you why this is no longer true.

Let’s first consider the bond market. The common formula is that when interest rates go up, bonds go down – and when interest rates go down, bonds go up. JP Morgan reports that from 1982-2018, which was a predominantly falling interest rate environment, corporate bonds returned 9% per year and outpaced inflation by 6% per year.

From 1958-1981, when interest rates were increasing, corporate bonds returned only 3% per year and actually had a negative real return when adjusted for inflation. Today, with interest rates low, they will either remain low or increase which is not favorable for bond investors.

This means that a real return analysis of a 50/50 (stock/bond) portfolio in a falling interest rate environment would have made income distribution very manageable at 7.5%. However, under the rising rate environment, which is likely in our future, the 50/50 portfolio provides a real return under 1.0%. This is the single greatest challenge for retirees – bonds will provide risk reduction but very little income.

Many investors may be tempted into more aggressive investments like high yield (junk) bonds or more equities. If an investor decides to simply add more high risk investment to his portfolio, he runs the risk of a bear market wiping out his retirement nest egg.

Purchasing an annuity contract with a guaranteed lifetime income benefit could be considered. These are complex in nature but a good financial advisor should offer scenarios that shift a client’s traditional 50/50 stock/bond portfolio to a 50/25/25 stock/bond/guaranteed annuity portfolio.

To summarize, applying a specific withdrawal rate to one’s retirement becomes a lazy solution to avoid doing your homework.  A better approach is to have an actual financial plan. Start with your budget and break that into fixed (needs) and discretionary (wants) items expenses.  What expenses will change in retirement?  What sources of income are available to you in retirement and how reliable are they?  Do you have enough stable or guaranteed income to cover your necessities?  Working with a Certified Financial Planner to help you develop a working plan to meet your goals is a better way to eliminate the guesswork and feel confident about your withdrawal strategy.

Olson Wealth Group is a full service wealth management firm. With wise counsel and clear strategies, our experienced specialists provide tailored approaches that strive to maximize wealth. For more information, please visit

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