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Low Bond Yields and Safe Portfolio Withdrawal Rates

David M. Blanchett, Michael Finke and Wade D. Pfau
The Journal of Wealth Management Fall 2013, 16 (2) 55-62; DOI: https://doi.org/10.3905/jwm.2013.16.2.055
David M. Blanchett
is head of retirement research at Morningstar Investment Management in Chicago, IL.
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  • For correspondence: david.blanchett@morningstar.com
Michael Finke
is a professor and PhD coordinator in the Department of Personal Financial Planning at Texas Tech University in Lubbock, TX.
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  • For correspondence: michael.finke@ttu.edu
Wade D. Pfau
is a professor of retirement income at the American College in Bryn Mawr, PA.
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  • For correspondence: wadepfau@gmail.com
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Abstract

The majority of research on sustainable withdrawal strategies has used either historical rolling time periods or a stochastic (Monte Carlo) simulation process based on long-term averages, where the expected return of an asset class is the same for each year of the simulation. While these approaches may be reasonable to describe long-term averages, we believe they are less useful when there is a significant and sustained deviation, such as the current low bond yield market. This article introduces a model that takes into account current bond yields and allows them to “drift” toward a higher value during retirement, using an autoregressive model based primarily on historical relationships between asset classes. This approach can better replicate the actual bond returns a current or near retiree can expect during retirement both now and in the future. Using this model, we find a significant reduction in “safe” initial withdrawal rates, with a 4% initial real withdrawal rate having approximately a 50% probability of success over a 30-year period. It finds that a retiree who wants a 90% probability of achieving a retirement income goal with a 30-year time horizon and a 40% equity portfolio would only have an initial withdrawal rate of 2.8%. Such a low withdrawal rate would require 42.9% more savings if the retiree wanted to pull the same dollar value out of the portfolio annually as he or she would get with a 4% withdrawal rate from a smaller portfolio.

TOPICS: Retirement, simulations, portfolio construction, fixed income and structured finance

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The Journal of Wealth Management: 16 (2)
The Journal of Wealth Management
Vol. 16, Issue 2
Fall 2013
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Low Bond Yields and Safe Portfolio Withdrawal Rates
David M. Blanchett, Michael Finke, Wade D. Pfau
The Journal of Wealth Management Jul 2014, 16 (2) 55-62; DOI: 10.3905/jwm.2013.16.2.055

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Low Bond Yields and Safe Portfolio Withdrawal Rates
David M. Blanchett, Michael Finke, Wade D. Pfau
The Journal of Wealth Management Jul 2014, 16 (2) 55-62; DOI: 10.3905/jwm.2013.16.2.055
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  • Article
    • Abstract
    • BOND YIELDS TODAY
    • WHY RETURN SEQUENCE MATTERS
    • RESEARCH ON SUSTAINABLE WITHDRAWAL RATES
    • METHODOLOGY
    • RESULTS
    • CONCLUSIONS
    • APPENDIX A
    • REFERENCES
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