A study by Fidelity looks at strategies for retirement income. They present in Exhibit 1 a simulation showing how the sustainable inflation-adjusted withdrawal rate depends on life expectancy. For example, for a planning horizon of 27 years, the range of sustainable withdrawal rates is 3.93% to 5.58%, but for a horizon of 11 years the range of withdrawal rates is 8.62% to 10.89%. As explained at the end of the paper, the lower rate corresponds to a 90% probability of not outliving assets, and the higher number to a 50% probability. The paper also explains what assumptions about stock and returns are being made.
I'd have to write my own computer program to verify their results, but their finding that sustainable withdrawal rates depend on life expectancy accords with common sense. People should stop advocating a
4% rule without saying what life expectancy is being assumed.
IIRC, assuming historical returns, at a 4% withdrawal rate and invested with an allocation of xyz, it's typically claimed one would never run out. I think it's also usually noted that this is of course only a rough guideline. Financial planning involves forecasting returns and extensive assumptions, so it cannot be an exact science. (I know you know this, BWS. The comment is for the newbies.)
If one is going to use a guideline like that, assuming a perpetuity, one needs to watch it carefully, given that we are also assuming volatile investments (what is the typical assumption - 60/40 stock/bond? ).
Such a plan needs regular review and if it looks like it's not going to cut it, the drawdown needs to be adjusted or, of it's looking really bad, one might have to give up on the idea of a perpetuity which leaves the original assets intact (ie. for an inheritance) and instead start to consider immediate annuities (which typically bump up the drawdown rate because the insurance component makes sure that you don't out live it - in exchange for leaving nothing behind when you are done).
Here's an example scenario:
If you're 65 and have a million bucks, one might assume that one can pull out $40k/yr indefinately (adjusted for inflation). If after a couple of years, the asset balance has not kept up with inflation (or gone down!), say, at
70, the balance is, rather than 1.15 million as one would hope, given 3% inflation, instead, say it's only 950k, either one starts taking out less - $38k is now 4%, and given inflation, the purchasing power of that $38k is equal to only $33k of purchasing power 5 years earlier! - or if that $33k of purchasing power just isn't going to be enough, the remaining 950k may be partially invested in an immediate annuity to make up the difference. At 70, a female (chosen because for the sake of example, payout level will be lower) who puts 450k into an immediate fixed annuity (no guaranteed min, no inflation adjust) at current rates will get approx $38k/yr just from that annuity. So the remaining $500k may continue to be invested - the drawdown on it would need to be only between 1 and 2% (at least in the first year) to maintain the original purchasing power.
That's a heck of a contingency plan if the 4% perpetual drawdown plan starts to look like it's not going to really cut it. And without much worry about life expectancy either, though if inflation really kicks up, the drawdown on the invested portion may have to go up pretty fast. I didn't see an easy online annuity quote for a plan with an inflation adjustment.
In article , snipped-for-privacy@fractious.net wrote: ...
Vanguard has a page from which (following appropriate links) you can get quotes that include inflation adjustment:
For the scenario you cite (70 year old female, initial $450,000 to set up the annuity [and specifying CA as the state], the annual payout would be $28,560.
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