RT Journal Article
SR Electronic
T1 Low Bond Yields and Safe Portfolio Withdrawal Rates
JF The Journal of Wealth Management
FD Institutional Investor Journals
SP 55
OP 62
DO 10.3905/jwm.2013.16.2.055
VO 16
IS 2
A1 Blanchett, David M.
A1 Finke, Michael
A1 Pfau, Wade D.
YR 2014
UL http://jwm.pm-research.com/content/16/2/55.abstract
AB 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