From the July 2004 Journal of Financial Planning
Sustainable Retirement Withdrawals
by Ahmet Tezel, Ph.D.
This paper finds six best timing portfolios using five asset classes and historical quarterly data from 1926 to mid-2003, and reports sustainable withdrawal rates for these portfolios.
To ensure a reasonable level of withdrawals from retirement funds, investors should
Keep the risk of failure below 10 percent for real withdrawal rates of 7 percent, 5.5 percent, and 4.5 percent over horizons of 10, 20, and 30 years respectively.
Diversify among large and small stocks, government bonds, and Treasury bills. Stocks, large and small, should be held in proportions as high as 80 percent to 90 percent of the retirement portfolio. Investors should invest 5 percent in Treasury bills and vary the long-term and intermediate-term government bonds allocations between 2 percent to 7.5 percent.
For larger real withdrawal rates, 95 percent to 100 percent of the portfolio must be invested in large and small stocks, with odds of failure greater than 10 percent. There must be more flexibility to investors' spending plans in case of significant declines in the stock market if they wish to withdraw higher real amounts than indicated above.
All the methodologies assume that history provides a guide to the future. Any doubt about future trends being different from the past—such as that prospective equity risk premiums might be lower—would call for adjusting the inputs for all methods.