RT Journal Article
SR Electronic
T1 How Did the Financial Crisis Impact<br/>Retirees’ Safe Withdrawal Rate? <em>A Markets-Based Answer</em>
JF The Journal of Investing
FD Institutional Investor Journals
SP 41
OP 48
DO 10.3905/joi.2013.22.1.041
VO 22
IS 1
A1 Michael W. Crook
YR 2013
UL https://pm-research.com/content/22/1/41.abstract
AB Individuals retiring in the aftermath of the financial crisis face an unprecedented market environment. Accommodative monetary policy and below-trend economic growth present retirees with historically low interest rates and the longest period of negative real short-term interest rates since the Great Depression. The result is likely a period of belowaverage, modest total portfolio returns that present a particular challenge to retirees.Most studies of safe retirement withdrawal rates have concluded that a 4% initial withdrawal adjusted for inflation over subsequent years provides a reasonable margin of safety over 30 years. However, these studies generally use historical analysis or forward-looking return analysis based on long-term return estimates and/or average realized returns. Because of this approach, an extended period of low nominal rates and negative real rates is not captured in traditional methodologies; therefore, these methodologies run the risk of overstating safe withdrawal rates.As an alternative, this article presents a market-based methodology for determining appropriate spending policy. Simulation analyses along with market-implied capital market assumptions (CMAs) are used to estimate feasible distribution rates for various portfolios over the next 30 years. The results imply that an initial withdrawal rate of 4% is unlikely to provide investors with a sufficient margin of safety. Instead, lowering initial withdrawal rates to 3.5% is likely to prove prudent.TOPICS: Retirement, wealth management