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.

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John Sweeney is an executive vice president with Fidelity Investments.


Dominic Gioffre from Delaware 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 Wisconsin 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 Virginia posted about 1 year ago:

I pose the same question as Michael Bork.


Dave Gilmer from Washington 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 New Jersey 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 California 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 New Mexico 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 Colorado 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 North Carolina 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 11 months 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 11 months 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 Oregon posted 4 months 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 Florida posted 2 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 Louisiana posted 2 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 Hawaii posted 2 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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