July 2004 Journal of Fin. Planning - SWRs

[intercst]

From the July 2004 Journal of Financial Planning

Sustainable Retirement Withdrawals

by Ahmet Tezel, Ph.D.

http://www.fpanet.org/journal/articles/2004_Issues/jfp0704-art7.cfm

Conclusions

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.

</snip>

intercst

 

[hocus]

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.

This sentence from the paper is poorly stated.

The authors of the paper are quite right to note that lower equity returns require investors with high-stock-percentage portfolios to limit themselves to a lower withdrawal rate. They are mistaken, however, in suggesting that equity returns lower than "normal" for time-periods starting from extremely high valuation levels are a deviation from what "history" would lead one to expect.

The correlation between the valuation level at which a retirement begins and the long-term returns experienced from that point forward is an historical reality. If you are using history as a guide to the future, you must include that factor in your methodology for the methodology to be analytically valid. To presume that there will be no such correlation in your own retirement is to presume that stocks will perform in the future in ways different from how they have performed in the past.

Including additional asset classes such as international stocks, TIPS, and annuities may improve the sustainable withdrawals. In sustainability literature, however, an investigation into the effects of alternative and flexible withdrawal policies may be the next critical and rewarding research area.

I agree that there are circumstances in which one's safe withdrawal rate can be increased by including alternate asset classes and I agree that there is a lot of interesting work to be done exploring the effects of alternatve and flexible withdrawal policies. My personal expecation is that "the next critical and rewarding research area" in "the sustainability literature" will be studies of the effects of changes in valuation of the type now being conducted at the SWR Research Group board.

This paper provides insights. But the level of practical understanding of SWR-related questions possessed by those in this community who have participated in the SWR discussions we have held over the course of the past two years has advanced beyond the level demonstrated by the authors of this paper, in my view.

 

[arrete]

Interesting article. BTW, if you get a screen that wants a ID number, just keep hitting cancel and it will let you in anyway.

I tried printing it to see the tables better, but that was marginal at best - get you magnifying glasses out.


arrete

 

[WilliamG]

Arrete - did you click the "printer friendly" in the upper right hand corner of the screen before you printed?

 

[arrete]

Arrete - did you click the "printer friendly" in the upper right hand corner of the screen before you printed?

Yep. Got that ID thing again, hit cancel a couple of times and got in again. That's the way I printed it.

arrete

 

[mickeyd]

Thanks Intersct,

Great article.

I used to get "Jr of FP" when I was a member of FPA and have missed quality articles like this.

It addressed an intermediate bond issue that I have been researching recently.