Systematic Withdrawal Strategies for Retirees

Abstract

The high-profile debate on spending in retirement often misses a crucial point: No single spending rate suits all retirees. This article develops guidance on spending rates for retirees. Taking into account uncertain asset returns, inflation, and longevity, the authors identify spending rates and asset allocations that minimize the expected lifetime shortfall for a systematic withdrawal plan.

The analysis shows that sustainable spending rates depend critically on a client’s age, gender, and risk tolerance. It also demonstrates that retirees can reduce the risk of outliving their wealth and increase their expected future bequest by allocating at least some of their portfolios to equities. Moreover, the younger the retiree and the greater her spending needs, the more she should allocate to equities. Finally, because their wealth must last longer, couples should allocate more to equities and spend at a more moderate rate than those who are single.