A Key to a Lasting Retirement Portfolio

by John Sweeney

If you’re retired—or nearing it—ensuring that your retirement investment portfolio lasts your lifetime is critical. And that’s not easy because by nature the stock market is volatile. What if a market downturn takes a bite out of your investment portfolio?

While you cannot completely control the market’s impact on your portfolio, there are things you can control that can also make a significant difference in how long your portfolio may last. One: your withdrawal rate from your portfolio. The amount you take can directly impact how long your assets could last in retirement.

But what about in difficult markets? At Fidelity, we still believe in inflation-adjusted withdrawal rates of no more than 4% to 5% a year for individuals who retire at age 65. That’s because we did the analysis using our Retirement Income Planner and an inflation-adjusted withdrawal rate of more than 5% steeply increased the risk of depleting retirement savings during an investor’s lifetime. We also ran some further analysis to determine the influence of different market environments.

[Editor’s note: Fidelity’s Retirement Income Planner is an educational tool developed and offered for use by Strategic Advisers Inc., a registered investment adviser and a Fidelity Investments company. The online tool can be accessed at and is free, though non-Fidelity clients are asked to register.]

Extended Down Markets

We looked at various withdrawal rates during a hypothetical extended down market. We used the Retirement Income Planner to see how a portfolio might have held up. We used a hypothetical balanced $500,000 portfolio of 50% stocks, 40% bonds and 10% short-term investments—an asset mix used by many retirees. Figure 1 illustrates how long this balanced portfolio might last with inflation-adjusted withdrawal rates between 4% and 10%.

As expected, the higher the withdrawal rate, the lower the number of years our hypothetical portfolio lasted. For instance, at a 10% withdrawal rate, the balanced portfolio only lasted 10 years. At a 4% withdrawal rate, however, the balanced portfolio lasted for 36 years—long enough to provide a 65-year-old with an income stream potentially lasting well into his or her 90s. That’s important because for a healthy 65-year-old couple, there is a 50% chance that at least one of them will survive to age 92½, according to the Society of Actuaries’ Annuity 2000 Mortality Table. (The figures assume a person is in good health.)

Up and Down Markets

We also looked at withdrawal rates another way—how they affected the value of a hypothetical portfolio through up and down markets and periods with very high inflation. We used a hypothetical $500,000 balanced portfolio (50% stocks, 40% bonds, 10% short term) for a couple who retired in 1972 and tracked it through 2011, using actual historical index returns. This period includes the great bull market of the late 20th century—roughly 1982 to 2000. But it also encompasses two of the worst bear markets in Wall Street history, five recessions, two major wars, and the rabid inflation and painfully tight monetary policy of the late 1970s—one of the worst inflationary outbreaks in U.S. history.

As Figure 2 shows, the initial $500,000 would have been exhausted by the late 1980s if funds were drawn down at a 6% rate. (All rates are adjusted annually for inflation.) A 5% withdrawal rate could have extended income from the portfolio for nearly 25 years, but it still would have run out at a time when there would be more than a 50% chance that one member of the couple would need those assets. In this extreme case, only a 4% withdrawal rate would have left enough total assets intact to catch the full tailwind of the long bull market that ran from 1982 to 2000.

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Figure 2. The Life of a Hypothetical Retirement Portfolio


Our analysis clearly shows that the amount of the annual withdrawal rate dramatically raised or lowered the chances of a portfolio lasting for a longer period of time. And the risk of running out of money is a real one. Americans are living longer these days, so it’s entirely possible that your retirement could last for 30 years or more.

This chart also illustrates how the combined risks of inflation, market volatility and withdrawal rates run parallel with the risk of longevity itself, which is so easy to underestimate. Additionally, it further illustrates the power of potential stock returns—given enough time—and the critical importance of withdrawal rates. This isn’t to say that a 4% to 5% withdrawal rate offers magical security or assures infinite asset sustainability. Those outcomes depend on market performance. But it is clear that rates much above 5% begin—fairly quickly—to increase depletion risk of a retirement income plan.


Unlike the performance of your investments, your withdrawal rate is one of the variables that you can control and adjust as needed to take into account your age, health, availability of other assets and desire to leave money for your heirs (your asset allocation and actual retirement age are a couple of other key variables that you can influence). Staying within or below a 4% to 5% range (adjusted annually for inflation) will decrease the risk of depleting your retirement savings too soon. A more conservative withdrawal rate may also put you in a better position if a severe market downturn takes place. For this reason, we believe that most retirees should consider using conservative withdrawal rates—particularly if your assets need to support essential expenses. Retirees may feel comfortable taking a higher withdrawal percentage (with greater chances of depleting assets) when running out of money has no severe consequences.

John Sweeney is an executive vice president with Fidelity Investments.


Dominic Gioffre from DE posted about 1 year ago:

The corallary to this study: Accumulate more than you need so that you can lower the withdrawal percentage.

Michael Bork from WI posted about 1 year ago:

I assume that the withdrawals were taken equally from all parts of the portfolio. I would like to see what would happen if all withdrawals were taken from the 10% short term cash which would be periodically replaced from the other two parts of the portfolio. I would guess that the rate could then be higher before cashing out the account.

R Hixson from VA posted about 1 year ago:

I pose the same question as Michael Bork.


Dave Gilmer from WA posted about 1 year ago:

I agree that your withdrawal rate is one of those variables that can be controlled, but there are others, such as the guarantee you might get from a dividend payer that could increase it's dividend for 30+ years. Also the proportion of your income that comes from other guaranteed sources such as pensions or SS, leaves you a much easier chance of adjusting your other income from your savings.

Ed from NJ posted about 1 year ago:

The best way to ensure you will not outlive your money is to retire with all the money you will need during retirement, including the inflation impact.

The second best way to retire is to retire with all the money you will need during retirement, excluding the inflation inpact. Here you need only invest to cover inflation every year.

If you can't achieve either of these two options on the day you retire, then do not retire until you do.

Michael Poizner from CA posted about 1 year ago:

Any management fee paid to a financial planner or stockbroker should be considered. Thus, if I want my portfolio to last based on a 4% withdrawal rate and I pay a 1% management fee, my actual withdrawal rate should be no more than 3%(inflation adjusted}.

Bill Jones from NM posted about 1 year ago:

Have you not heard of Required Minimum Distributions? They increase every year and are soon above 4-5%.

What is assumed about them?

Nordron from CO posted about 1 year ago:

Note that IRA/401K distributions, including required minimum distributions, are taxed at your regular (marginal) tax rate. If you invest in equities, the capital gains are taxed at your lower capital gains rate and there is no required minimum distribution. Thus, you may be better off forgoing an IRA/401K (unless your company matches) and buying equities instead.

R Chichester from NC posted about 1 year ago:

Although you must take the RMD's, nothing says you have to spent it. You can reinvest it in Muni's or taxable accounts.

Mike S from Florida posted about 1 year ago:

The inflation adjustment is not described! Does it mean that if in a given year there is 10% inflation and you are following a 4% withdrawal rate that you now withdraw 14%! That will be very dangerous unless your portfolio inflates at close to the inflation rate. Better to have no inflation rate adjustment and a slightly higher withdrfawal rate. I advise people to at all possible to hold their wiothdrawal rate to no more than three percent and carry a cushion of 18 to 24 months of normal expenses in cash or CDs that is not considered part of their long term portfolio from which the withdrawals are made.

Ralph Strong from Maryland posted about 1 year ago:

Something is wrong with the figure showing withdrawal rates vs portfolio value. With 4% withdrawal rates, the portfolio value grows at about 4.6% plus inflation over the 1984 - 1994 period. For 5% withdrawals, the portfolio value decreases at around 2% per year indicating that total return is less than 5% + inflation about 2%. Inflation war around 3% in those years, so why didn't the portfolio stay about flat for those years?

Michael Henry from OR posted about 1 year ago:

Hmmm..... Did you check the PE-10 ratio difference between 1972 and Dec. 2013?
1972 = 17.25
12/2013 = 25.25

Also, have you checked expected returns for bonds over the next 20-30 years compared to 1972?

The expected stock market return going forward from now compared to 1972 is much lower. You can plan on safe withdrawals of 4%-5% at your own peril.

See Wade Pfau:

Plan on more like a safe 3% withdrawal.

Richard Abbott from FL posted 11 months ago:

I agree with the gentleman who stated don't retire if you don't have enough money to last through your entire retirement.

There are enough retirement calculators available to figure in any pensions you may have, social security and other sources of income that you may have to come up with a figure plus income from any other retirement accounts you may have to determine if you have enough to retire on comfortably.

Otherwise you may have to work longer or take a part time job for awhile to accumulate the necessary income for retirement.

Bill Dooley from LA posted 11 months ago:

I believe there are thousands and thousands of people retired that have nothing but social security to live on due to poor or no planning. And they don't care to go back to work or work part time. Who do think they'll be depending on in a not so bright future for them?

William King from HI posted 11 months ago:

Guyton and Klinger's 2006 "Decision Rules and Maximum Initial Withdrawal Rates" provides an interesting framework. The normal distribution is adjusted by inflation with three exceptions. If the portfolio return is negative then no inflation adjustment. If the current withdrawal rate exceeds the initial withdrawal rate by 20% then the distribution amount is reduced 10%. If the current withdrawal rate is less than the initial withdrawal rate by 20% then the distribution amount is increased by 10%. The resulting withdrawal rates were in the 5's. Obviously some pros and cons with this.

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