Dipping Into Retirement: How Much Is Too Much?

How much money can you take out of your retirement funds each year and not risk running out of money?

Financial planners and academics have debated this subject for years, but real-world data have been scarce. The experts typically used average returns for various investments--stocks, bonds and cash--to argue their points. But retirees worried that a withdrawal rate that might be safe under “average conditions”--say, assuming stocks returned an average 11% per year--would be too high under real conditions, should stocks drop 40% in two years, as they did in 1973-74.

Last year, however, three business professors from Trinity University in San Antonio looked at how various withdrawal rates would affect different portfolios using actual returns from stocks and bonds over the last 70 years. That period includes the two worst markets for stocks: the Great Depression and the early 1970s bear market. The professors hoped that studying the behavior of past markets could help investors make decisions about their investments going forward--although no one can guarantee future markets will resemble those of the past.

The researchers found that the “safe” withdrawal rate--the rate that would allow the money to last throughout the withdrawal period, regardless of market conditions--historically has varied by the proportion of stocks to bonds, how long the investor expected to live and what happened with inflation. Their findings:

* The safest withdrawal rate is 3% of the total portfolio. All the portfolio mixes, from 100% stocks to 100% bonds, could survive a 30-year withdrawal period at that rate. Adjusted for actual inflation experienced during those 70 years, all but the 100% bond portfolio survived any 30-year period.

* At higher withdrawal rates, having a mix of stocks and bonds is important. Withdrawal rates of 4% to 5% required a portfolio consisting of at least 25% bonds to survive 30 years. The interest payments provided by bonds can help investors weather a downturn in stocks.

* Too many bonds isn’t good, since stocks often have offered inflation-beating returns that bonds don’t. An all-bond portfolio had only a 51% chance of lasting 30 years at a 5% withdrawal rate; when adjusted for inflation, the all-bond portfolio had only a 17% chance of survival.

* If an investor wanted to take out more, say 7%, the best portfolio mix would be 50% stocks and 50% bonds, but she would have to hope that inflation remained low. Without adjusting for inflation, she would have had a 100% chance of the portfolio lasting 15 years, a 96% chance of it lasting 25 years and a 90% chance of it lasting 30 years. When adjusted for inflation, only one of the portfolios--the all-stock version--could offer even a 60% chance of surviving for 30 years.

The study can be found at https://www.aaii.com/promo/mstar/feature.shtml.