The search for a safe withdrawal rate

Managing money while in retirement is significantly different compared to the accumulation years. In the accumulation years, from about age 25 to 65 for most people, you are regularly adding more and more money into your retirement accounts. But once you stop working, that all changes. Now you must determine how much money you can withdraw from your investments to have the income you desire. But how can you know how much money to take out without running out of funds over your lifetime? This is an important question especially in light of people living longer and longer. If your final years also include a nursing home stay, the chances of running out of money increase.

There are generally two schools of thought when it comes to what is a “safe” withdrawal rate. These are talked about in length in a great article from Wade Pfau who is a retirement researcher.


Investing involves risk. There is no guarantee that the assets we put in the stock and bond markets will achieve a particular rate of return. However, we have a lot of historical data to be able to make reasonable assumptions. Academically, Modern Portfolio Theory has defined what is called the “Efficient Frontier.” This is a set of investment portfolios that are expected to provide the highest possible return for the least amount of risk. For instance, a portfolio with 100% stocks would have the highest rate of return expectation, but also likely have a lot of downside volatility. Conversely, another portfolio that was only 40% stocks and 60% bonds would have a smoother ride, but not be expected to make as much money over the long-term.

But retirees don’t have as long of a time horizon as the accumulator. Conventional wisdom says that as you age, you should lessen your risk since you need to be drawing money out of your portfolio. Research was performed by William Bengen and published in the Journal of Financial Planning in 1994. This research led to what is commonly referred to as the “4% rule”. Bengen and others, determined that a “safe” withdrawal rate of 4% is reasonable for someone who has a long retirement. This assumes the portfolio that is 50% stocks and 50% bonds. This level of 4% was determined to essentially be the “sweet spot” that would give your portfolio a very high likelihood of lasting your entire lifetime. By looking at historical data from 1926 forward, if you take more than a 4% withdrawal, then you start to increase your risk of running out of money before you die. While this is talked about as being “safe”, it is not guaranteed. Further, Bengen suggests that most portfolios will benefit from having an overall stock allocation of closer to 75%. While the data suggests this optimizes lifetime income, not everyone can be comfortable with that much downside exposure.


Conservative investors may be more comfortable by taking some of their investments and either putting them in a bond ladder or income annuity. With safer, income producing assets like these, you can count on a base level of income that is very likely to be there regardless of stock market volatility. Proponents of Option #1 would say you don’t need to do this, and that over the long-term you will likely end up with a lower amount of income in your retirement years. That may be the case, but the conservative approach may provide better protection from a 2008-like market crash. If the markets are generally good and up-and-to-theright during your retirement years, running short of money will likely not be much of a concern.

It really comes down to three things:

  1. Your specific details. Do you have debt? Do you face an elevated health risk? Do you have a pension in addition to Social Security? These factors matter greatly and may determine if you can take 5% from your portfolio, or maybe you should only take 3%.
  2. Your level of optimism. Quite simply, if you don’t expect good stock market returns, then maybe you need to take action to adjust your portfolio. We can’t know the future, but we can make decisions today to control how our money responds to different markets that are coming our way.
  3. Your lifestyle choices. How much money do you need in retirement? What is your stress level when you see the stock market going up and down? Do you have a plan in place that you understand and is simple to manage? Many retirees want to be able to spend the most during the GO-GO years; spend less in the SLOW-GO years; and then expenses may increase if they run into the NO-GO years. Your plan needs to have flexibility built in to respond to these different lifestyle phases.


The most important thing to keep in mind is that the rules of the game are different in retirement. How your investments fare changes greatly when you are regularly drawing money from your accounts. Whether you take a probability-based path or a more guaranteed path, make sure you take the time to know your options and position your money for the type of retirement you desire. Article written and produced by Andy Beshuk, owner of Providence Financial LLC. He may be reached at 573-634-4888, or email: Investment advisory services offered through Providence Financial LLC, a Registered Investment Advisor in Missouri. Past performance is not a guarantee of future results; content is not considered legal or tax advice. Guarantees are based on the claims-paying ability and solvency of the issuing institution. Past performance is no guaranty of future results.

Andy is a on-going article contributor to the Jefferson City News Tribune’s special section called “Active Life”. Below is a collection of his articles that have been published in previous editions.

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