Moshe A. Milevsky is an associate professor of finance at the Schulich School of Business, York University in Toronto.
Huaxiong Huang is a professor of mathematics at York University in Toronto.

## Discussion

Robert from TX posted over 3 years ago:

It is complex and hard to follow at first but without the full study that it warrants I believe --at his point that it makees a lot of sense but this may be because it seems to follow what I have somewhat intuitively been doing for the twentysix years of my retirement---so far. I plan to study it more as I can devote more time .

Ted from CA posted over 3 years ago:

Back in 2003 AAII published a chart in the annual "Top Mutual Funds" titled "Withdrawal Plans: How long will your Capital Last?". The ordinate (vertical axis) showed "average annual growth % from 1%-12% (of capital) and the abscissa (horizontal axis) showed "If the annual withdrawal rate of your capital is: 5%-16%.
In other words, you could determine how long your capital would last withdrawing from 5-16% annually with a growth rate of 1-12% annually. It is the single best chart I've ever seen (in my 68 years) for determining retirement spending at a glance because financial circumstances change continually and unexpectedly. Simply looking at the chart will allow determination in a few seconds whether you should increase, decrease or leave as-is your withdrawal rate.
I've never seen the chart again despite a couple of serious searches. Happily, I cut it out and have it taped over my desk.
It would really be nice if AAII would reproduce that chart for those who might be interested.

Mark from TX posted over 3 years ago:

The Chart that Ted mentions would be very interesting to review. I would appreciate AAII following up on this as well.

Jerome from AZ posted over 3 years ago:

At first I thought there would be some humor imbedded in this article because of the title, but upon trying to understand the contents, the joke must have been on me. I don't really understand much of it even though I have an accounting background and took courses in statistics and am very comfortable with numberrs!

Chipper from NJ posted over 3 years ago:

Wow Robert you were able to follow it? I couldn't. Does anyone know what it means in plain English?

Norman from CA posted over 3 years ago:

Interesting Robert. Your 2003 AAII published chart seems like a valuable tool because of the changing parameters effecting portfolio withdrawal rates. Hopefully AAII will reproduce this for subscribers.

James from MD posted over 3 years ago:

I'd like to see AAII publish a link to the chart as well.

Norman from CA posted over 3 years ago:

Whoops, I was responding to Ted's post, not Roberts.

Don from TN posted over 3 years ago:

Wonderful article! What exactly did it say? The 4% rule isn't very good. How much you withdraw depends on: how afraid you are of outliving your money, how much you want to leave to your heirs, the rate at which your investments earn a return, how much pension income you also receive, and whether you choose to hold some investments as an annuity. Given all that, you would probably withdraw somewhere around 4 - 6% per year. Oh, and P.S., we made a lot of assumptions in our model that aren't real.

The Reader Digest version of this article would have been much better than the real thing. It pays to remember that if you put all the economists in the world in a row, they only thing they couldn't reach would be a conclusion.

Donald from VA posted over 3 years ago:

While I have a copy of the chart, I would like to have it expanded to show withdrawal rates from 2% to 16%. Can AAII acomplish that?

M from TX posted over 3 years ago:

My take-away is that your withdrawal rate should change (on a yearly basis) as circumstances change. Having the chart Ted mentions would make this yearly re-calculation simple.
One assumption that all the retirement tools have is that you don't retire until 65, does anyone know of a tool that allows for any retirement age? I was fortunate to be able to retire in my mid-fifties with a pension.

George from OH posted over 3 years ago:

I was able to to save millions in my retirement account-but this article tries to summarize how to spend it in a few words and simple formulas.
Life is not that simple! But thanks for the try!

David from FL posted over 3 years ago:

As others have noted, I would like very much to see the summary chart Ted mentioned, or perhaps an updated version that puts the monetary data in graphic, rather than narrative, form. If that is not possible, then I would agree that the article itself is of limited value. I have a pension, Social Security and a portfolio, and a life insurance plan, but I still can't use the article by itself to make monetary decisions.

Dennis from CO posted over 3 years ago:

Although the authors didn’t state it explicitly, but several reviewers did, spending during retirement should be flexible considering the different types of incomes, rates of return, and expenses to be encountered, i.e., retirement entertainment and travel expenses early in retirement and possibly long term care and health costs later in retirement along with any end of life estate considerations.

An interesting non-AAII research article dated November, 2010, and entitled, “A more dynamic approach to spending for investors in retirement,“ looked at three spending strategies during retirement. It attempted to assess withdrawal strategy trade-offs considering different inflation rates, spending strategies, and different asset class returns as well as suggesting guidelines for an initial withdrawal rate.

Jacob from TX posted over 3 years ago:

Interesting article. Somewhat hard to follow, but I think I understand the main concepts. As I am recently retired at 57, am looking at buying an annuity with some of my retirement savings, this article makes sense, i.e. makes the point that annuity income removes some of the longevity risks allowing one to spend a greater % of their " net egg" with somewhat less concern then they would have without that annuity income.

Joseph from NY posted over 3 years ago:

Here are links to the article mentioned by Dennis

A discussion of the study, fairly easy to understand:
https://personal.vanguard.com/us/insights/article/retirement-savings-03012011

The study itself:
http://us.vocuspr.com/newsroom/ViewAttachment.aspx?SiteName=vanguardnew&Entity=PRAsset&AttachmentType=F&EntityID=725290&AttachmentID=24be5cd2-6174-40d0-b3f2-f74988b09216

Jean from IL posted over 3 years ago:

Ted from Calif. and others: Here's the link to AAII's "Withdrawal Plans: How Long Will Your Capital Last?" table:
http://www.aaii.com/classroom/article/fund-mechanics-investing-redeeming?page=3

It's found in our Investor Classroom area - it's under Step 3 of the Fund Mechanics: Investing & Redeeming article.

We don't have an expansion of this table.
Jean from AAII

Richard from FL posted over 3 years ago:

Good article if you live on planet Vulcan. But here on planet Earth I prefer this method:
Find large financially stable companies who have a long history of paying stable and growing dividends. Invest my assets into these companies and my withdrawal rate equates to the dividend yield at time of purchase. Of course my life style is dictated by my withdrawal income (dividends) not the other way around. Now as time goes on and these companies steadily increase their dividends, my withdrawal rate (based on the amount invested) goes up not down like on planet Vulcan. My portfolio value may go up and down with the whims of the market but my dividends are steady eddy, rising with company growth and inflation effects. Hey, and no fancy computer statistical analysis schooling required.

Charles from WI posted over 3 years ago:

Milevsky and Huang are like a chemistry teacher my dad had in high school 80 years ago. Very smart but unable to communicate below an academic level.

Anyone reading this post already has an advantage over the average investor/victim looking to be sheared by retail broker dealers. Taking personal responsibility means educating oneself, developing an investment process based on your own convictions, then executing the plan without external or internal distractions.

The central problem of financial planning is how to create an inflation adjusted life income from a lump sum of money; that is a defined benefit from a defined contribution lump sum in the parlance of retirement plans.

Easy to promise, hard if not impossible to deliver.

Milevsky and Huang's model simplify the mathematics by assuming away all the variables that matter in real life. During the debt crisis of 2008 many large bets were based on math models that had worked in the past. When they failed to work is when they were needed the most and we all know what happened.

The best one can hope for with these models whether they are marketed under the name of Monte Carlo simulations, stochastic modeling or other similar buzzwords is that an "acceptable" level of failure be it 1, 3, or 5% is still unacceptable to those of us who have failed. We take little comfort in the success of others when we are broke.

Keep getting smarter, minimize investment costs, and live below your means and you will likely die before your money does.

Ted from CA posted over 3 years ago:

To Jean @ AAII
Thanks very much for publishing the link to the chart "Withdrawl Plans: How long will your capital last?"!

Donald from TX posted over 3 years ago:

You really had to want to read this article to get through it. I believe it tried to say, " If you have a guaranteed pension income for life, you are well ahead of those who must rely on what they saved for retirement without the benefit of a guaranteed pension."

Of course you can spend more, because the basic necessities are taken care of with the guaranteed pension. The savings beyond that are a luxury that you can enjoy as you see fit.

I am blessed with several pensions earned during my working years that sufficiently take care of my retirement needs. The million dollars I have in retirement savings and investments continues to be untouched. The first time I will have to withdraw from those savings will be the age 70 1/2 mandatory withdrawal from the IRA. Even then I will likely withdraw the required amount, pay the taxes due, and save the rest. I know my heirs will likely need it much more than me.

Nothing has changed. It all boils down to what you need in the way of income to meet your needs. Those needs vary by individual. This was an interesting article that required an intensive amount of concentration just to understand why it was being written.

Thomas from NY posted over 3 years ago:

I think it alln boils downn to smoothing consumption. ESPlanner is a software package that goes into this in more detail and enables one to build a consumption model based upon some of the variables identified in this article

Tom

John from IL posted over 3 years ago:

Mohse & Huaxiong:

Table 3 suggests that a utility maximizing retiree (no bequest or legacy motives) annuitizing 100% of his/her investable assets can withdraw between 35% and 60% more per annum than if he/she remained self invested.

In the real world, such a retiree is highly likely be able to withdraw more per annum than stated in Table 3, because he/she will invest in a balanced portfolio, not just in risk-free bonds, and would benefit accordingly.

Annuitization, as reported in previous AAII Journal and financial press articles, has a significant and positive role to play in retirees' investment strategies (asset allocation). But if Table 3 is correct and taken literally, utility maximizing retirees (no bequest or legacy motives) will rush out and sell all their investments, cancel their AAII subscriptions, and annuitize 100%. This isn't going to happen, and for good reasons. I believe that Table 3 is misleading.

Martha from ME posted over 3 years ago:

yes, I remember the old withdrawall plans chart and it was excellent ---unfortunately I do not have it "taped over my desk"! Can you please reprint it?

Richard from CA posted over 3 years ago:

Sounds like the withdrawal chart is a commmand request. I hope to see it!

Doug from WA posted over 3 years ago:

Not to make this a commercial, but Bud Hebeler has a touted software planning tool to help in this murky area.

Robert from CO posted over 3 years ago:

One issue not addressed here is the idea that the retiree may wish to accomplish something early on in retirement when young enough to have the requisite strength. Climbing mountains in other parts of the world, sailing, biking, etc. In this scenario it might make sense to plan to outlay a significant sum early on to realize a dream with the expectation that expenditures will be less once that period of activity is ended. Alternatively, the retiree may plan on helping a family member with a financial need(college tuition for example). Life is far to complex to assume that the presented model (elegant as it may be) will suffice. The Vulcan reference was appreciated though.

Mary from ME posted over 3 years ago:

I applaud the comments made by Jean from Illinois - this is a great plan. I'm taping this over my desk and referring to it often.

Jean from IL posted over 3 years ago:

If you missed it above: the withdrawal chart referred to in these comments is at this link: http://www.aaii.com/classroom/article/fund-mechanics-investing-redeeming?page=3
It's found in our Investor Classroom area - it's under Step 3 of the Fund Mechanics: Investing & Redeeming article. Jean from AAII

Lee from TX posted over 3 years ago:

Thanks Ted and Jean, I found the chart easily. Just a cut and past away.

Robert from GA posted over 3 years ago:

Although I got the gist of this article, I did not derive any new conclusions from it. As a detail-oriented layman, and one who retired early with limited income and assets, I have studied my financial situation very thoroughly. I simplified my analysis by doing the following:

1. Tracking my expenditures in detail well before I retired. After several years, I was able to project my future annual expenditures with a variance of plus or minus 10%.

2. I assumed that future inflation would cancel out future returns, as a conservative hedge.

3. I subtracted my annual defined pension and social security from my previously determined average annual expenditures. This left me with a shortfall that was not acceptable. I then pared the shortfall by examining every expenditure and reducing expenses where it hurt the least. Actually, the hurt was minimal, to my surprise. Raising insurance deductibles, dropping unread subscriptions, refinancing my mortgage to reduce my outgo, etc., were things I should have done earlier. Nothing essential to our lifestyle was cut.

4. My shortfall in pension income was then about \$6,000 per year. I divided my personal liquid assets by this shortfall to determine the years that my savings would last at this rate. I came up with a number of years that exceeded my expected longevity. If I had not had this result, I would have pared costs further, but that proved unnecessary.

5. I did not include my wife's income and savings in my calculations, as they were modest compared to mine. I considered this our disaster hedge against unexpected expenses or living longer than I calculated.

6. I also examined my wife's financial situation year by year, determining how she would be left financially if I died in year 1, year 2 etc. out to age 100. In all years, her financial situation equaled or exceeded my pre-death position. Having adequate whole life insurance in lieu of having a survivor annuity as a part of my defined pension insured that the loss of pension income would be mitigated by insurance proceeds and sale of certain assets upon my death.

7. I post all expenditures and income weekly, and update and re-examine my projections once a month to see if I'm still on track. If not, I make any necessary adjustments.

Note: Doing all of this on a computer spreadsheet takes a lot of tedium out of the process. Any changes I make are automatically reflected throughout the spreadsheet.

All of this took some time to set up, but I considered it vital to my family's financial security. When considering any new purchase, I am able to quickly assess the impact of that purchase on our long-term security, and make a sound decision. This technique may seem laborious to many, but I know of no better way. I will welcome suggestions for improvement, should anyone else be doing something along the same lines.

John from CA posted over 3 years ago:

If the majority of your retirement "savings" are in a traditional IRA you have required rates of withdrawl at 70. We are fortunate; it appears those requirements will be sufficient income -- as of now. Perhaps we'll leave a few \$\$ for the grandkids.

Richard from FL posted over 3 years ago:

Interesting Chart at:

http://www.aaii.com/classroom/article/fund-mechanics-investing-redeeming?page=3

This is a conservative (slightly misleading) chart because it assumes one withdraws money at the beginning of the year and it is therefore the remainder that grows at the stated percentage. This is most pronounced in the bottom right figures where the principle is depleted even though the 11% & 12% growth rates are matched with lesser withdrawal rates of 10% and 11% respectively. In the real world I think we all determine an expected growth rate long before we determine our withdrawal rate just as we withdraw against taxable earnings before we touch principle.

J from MA posted over 3 years ago:

Unfortunately here in the real world, on Planet Earth, real interest rates are negative (all the way out to the nominal 30-yr T-bond, less 3.8% YoY CPI). Table 1 has no such rate column. The article does give this current condition a nod ("Reducing interest assumptions will have the opposite effect"... Good luck!).

Negative withdrawal rates, anyone? ;-}

Fred from CA posted over 3 years ago:

Any financial model is likely to smooth out real variability. What has not come up in the discussions so far is the variability of individual life duration. Let's say your personal life-limiting medical problem is a family history of stroke. What may be important for your financial planning may well be the development of a clot-free artificial blood replacement. We all do not die of the same thing, so significant variance from an average accuarial table of life span is going to have a greater influence on how much you can spend. You can track such future developments through articles in the magazine Futurist.

Joshua from HI posted over 3 years ago:

I should have read the conclusion first -- before painstakingly trying to understand a useless academic exercise. In the end one would realize these professors can be easily mistaken as sophisticated annuity peddlers.

Richard from MD posted over 3 years ago:

The main problem with the chart in "http://www.aaii.com/classroom/article/fund-mechanics-investing-redeeming?page=3" is that my expectation of the future annual growth rate adjusted for inflation is low enough that lower withdrawal rates should have been included. My expectation is that conservative values inflation corrected growth rates are 0 to 1% for interest and 4 to 5% for stocks. Anyone intending to retire earlier than about 65 should probably consider withdrawal rates under 5%. An Excel spread sheet can easily be set up to extend the chart to lower withdrawal rates.