Taking Retirement Withdrawals From a Fund Portfolio

by Charles Rotblut, CFA

Retirees are commonly told they can safely withdraw 4% of their savings, adjusted for inflation, without running out of money.

Often this advice is presented with return data based on stock and bond market indexes. What is sometimes lacking, however, is an example of implementing the withdrawal strategy with a real-world portfolio.

Since I created a hypothetical portfolio for analyzing the effect of rebalancing (discussed in the article “Portfolio Rebalancing: Observations from 25 Years of Data,” April 2013 AAII Journal), I have the data to walk through the process and show where potential pitfalls may lie. The portfolios use actual funds that were available to investors over the time period studied, so the results presented should be close to what an investor could have actually realized on a pretax basis during the past 25 years. In other words, rather than relying on theory, these portfolios provide close to a real-world example.

Though I used mutual funds for my analysis, exchange-traded funds (ETFs) could be directly substituted without any significant changes. Investors holding individual stocks and bonds should group their holdings by asset class to follow the examples provided.

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Charles Rotblut is a vice president at AAII and editor of the AAII Journal. Follow him on Twitter at twitter.com/charlesrotblut.
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One change I made from the example shown in my April article was to incorporate an accelerating withdrawal rate. Each year, I increased the percentage withdrawn by the reported Consumer Price Index (CPI) for the year as an inflation adjustment. Factoring in inflation raised the annual withdrawal rate from 4.00% of the portfolio’s value at the end of 1988 to 7.65% of the portfolio’s value at the end of 2012. The inflation escalator was included since retirees will need to increase the amount of their portfolio withdrawals to cover rising expenses.

The good news is that a person who retired at age 65 in 1988 and turned 90 in 2012 would not have incurred longevity risk—the risk of outliving one’s savings—by adhering to the 4% withdrawal rate over that time period. This was the case even though AAII’s moderate portfolio allocation model, which uses a 70% allocation to stocks, was followed. The bad news is that the dollar size of the annual withdrawals did not increase every year and, if rebalancing is not employed, the allocation shifts to nearly 90% domestic stocks after 25 years.

The Mechanics of Adjusting Withdrawal Rates

The 4% rule recommends investors base their retirement withdrawal rates on the value of their portfolio at the start of retirement. In the analysis used for this article, the starting portfolio value is $100,000. I chose this number for its ease of calculation and analysis. It can easily be scaled upward or downward. Plus, any cumulative dollar changes can be quickly estimated through simple multiplication. (A $1 million portfolio would have had dollar amounts that were 10 times larger than the amounts shown in this article.)

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Charles Rotblut, CFA is a vice president at AAII and editor of the AAII Journal. Follow him on Twitter at twitter.com/CharlesRAAII.


Tony Mack from MA posted over 3 years ago:

Unless you are very wealthy, living on a 4% withdrawal plus $30K SS is not possible for a couple. With $1MM portfolio, that gives you $70,000 to live on prior to taxes. In this environment, a middle class couple needs $80,000 after taxes, or at least $100,000 prior to taxes. With a $1MM portfolio, that means a 7% to 8% withdrawal rate Sure,you can take 4% and live like you did when you were 22 and poor, but strong and an optimist. Not so when you are 70.

John from Florida posted over 3 years ago:

I would really like to see the results if a retirement of 1999 is assumed with a portfolio of $100,000. Am I still alive? Barely?

hmarrett from ny posted over 3 years ago:

It is clear that stock prices increase to adjust for inflation. If so, as it must be, just keep the 4% withdrawal rate without the CPI adjustment. On good years you eat steak on bad years canned tuna. You will not run out of money.


BRM from Loading...Wisconsin posted over 3 years ago:

Are the calculations in the article correct?

I thought the rule-of-thumb was that the amount (not the rate) of the first year withdrawal should be adjusted for inflation so that the withdrawal is always a fixed value in real terms (4000 current year dollars every year into the future).

Also 4.0% is quite sporty if you plan 40 years of withdrawals which is not unreasonable for a healthy 65 year old couple and future medical capabilities. Closer to 3.0% would be safer as would adjusting the amount of withdrawal on a yearly basis as a function of market performance.

Ed from WA posted over 3 years ago:

My understanding of the 4% rule is the same as BRM's. The amount of the initial withdrawl is increased each year for the rate of inflation. A retiree would therfore have an expectation that his standard of living would not decrease. The variation of the 4% rule presented in this article is not appropriate for most retirees. The variation in the amount withdrawn from year to year is too great.

Charles Rotblut from IL posted over 3 years ago:

I can rerun the numbers assuming the initial withdrawal amount is increased for inflation, instead of withdrawal rate, if there is interest. It may take a couple of weeks before I get to it, however.


Dave Gilmer from WA posted over 3 years ago:

Why not go to a 3 fund portfolio in 1993 by using VTSMX?

Would this be about the same allocation?

JDB from CT posted over 3 years ago:

Charles…I'd be interested to see this same calculation run using a dollar amount rather than a percentage .

John from Florida posted over 3 years ago:

Using the raw data from Table 2 total portfolio value if I retire in 2000 with $100000 by 2012 my portfolio value is $87025 and I'm eating tuna. My concern is that this exercise started in 1988 which was the start of a great bull market. If the numbers are run starting in 2000 which was the start of a bear market the end result is quite different. I don't have Charles spreadsheet so I can't see exactly where he rebalanced his portfolio but I don't think this approach is viable in a bear market but I would like to see further discussion.

Roundup from WA posted over 3 years ago:

This is a great practical article and a good follow up to the reallocation article. However, I too understand the 4% rule of thumb to call for increasing the initial withdrawal $ amount by the rate of inflation, not the %. It makes a big difference. The total withdrawal in Table 2 is $300,699. Increasing the initial $4,000 by a hypothetical 2% rate of inflation each year gives a total withdrawal of around $128,121. I would appreciate seeing a rerun of the numbers as Charles indicated.

AB from MA posted over 3 years ago:

Your article doesn't mention the MRD dictated by the IRS. It makes limiting a yearly distribution impossible without a large penalty. Using the IRS tables in Publication 590, which vary according to your circumstances, you quickly exceed a 4% MRD and the percent MRD withdrawal rates keep climbing from there.

Harry from OH posted over 3 years ago:

The best strategy for drawing down varies dramatically with the individual's situation. I've spent some time with a retirement planning tool and found that none of the suggested rules of thumb actually matches my retirement situation, and I will need to go by an indexed after-tax expenditure.

What I have found really important is to manage my essential expenses. In my case I have ben able to get the projected expenses within my projected lifetime income, leaving the portfolio to cover good times, in the form of discretionary expenses, and catastrophes.

rdv from Florida posted over 3 years ago:

Too Charles:

Please do rerun the numbers with the withdrawal rate adjusted for inflation only, rather than pegged to portfolio value.

Optimistically, that would show that the good years contribute sufficiently to sustain a steady withdrawal rate through drastic market declines. Giving up a third of the yearly withdrawal, as in 2008 (and still not fully recovered, per Tables 2 & 3) is more than most retirees can absorb.

It would also be good to see how more conservative portfolios would fare: a 50/50 and, if possible, a reversed 30% stocks/70% bonds. It would suffice to run these as pro-rata/rebalanced versions only.

rdv from Florida posted over 3 years ago:

PS to Charles,
In hope of improving the chance of seeing it done, I'll simplify my conservative portfolio request to a single 40/60 stock/bond allocation.

It should provide valuable perspective alongside the more aggressive allocation. Funds could be limited to Vanguard Total Stock Market (30%), Total International Stock (10%), and Total Bond (60%) or similar combination.

Thanks. Appreciate the article and the work.

dch from Colorado posted over 3 years ago:

As noted by the second post above from MA, it's all in the start date chosen. Since you picked Jan 1,1988, just about any reasonable combination of withdrawal rate and inflation adjustment you select will show world-class results. Fewer than 10 weeks earlier the market lost 22% in one day to a level not seen since, and the Fed opened the money firehose forcing Treasury bond prices up so fast that the futures market was lock-limit for about a week. Berkshire Hathaway A shares, for example, traded at $3500 back then.

I'd love to see the analysis rerun beginning from a market peak, say in the late 1960s or early 2000s.

David Levine from NC posted over 3 years ago:

Just my two cents. I agree that the percent is applied to the withdrawal not to the porfolio; the start year is critical, try 1965.
My observation has been that my retired friends all got out of the market in 2002 and 2008 after suffering thirty to fifty percent drops in their porfolios only to return to the market after it recovered. As far as MRD is concerned, this is only a problem with folks who have most of their ivestable income in IRAs. I myself live quite happily on a three percent withdrawal rate which will support me in perpetuity, though my body will not last quite that long. Folks need to remember a million dollars or even a few million is not what it once was. Enjoy your life.

sky from wy posted over 3 years ago:

dch, I think you would find that most of us working folks rely on our 401k or IRA to be our retirement income other than Social Security. The pension plans were taken away long ago for most of us and the expenses of raising a family took care of any extra non IRA/401k funds we might have had. If you are in the upper income level then it if fine to think about other income....but for most i believe that is not the case.
Also the example really needs to focus on the higher of either the 4% or RMD under an IRA. The latter is what most of us are facing and trying to plan for.

Jas from In posted over 3 years ago:

Recently I have read an article about the withdrawal rate. The article suggest that first five years of the retirement withdraw 6% rate. After 70 reduce witdrawal rate to 4% of the portfolio value.
I have calculated total dollar amount of withdrawal using this metod against the 4% rule and discovered that total dollar value spent during 25 years(age 90) were insignificant considering the age.
Their assumption is that during the early years of retirement cost of travelling or any activity will be higher than when you are unable to spend money when you are in mid 80's. According to 4% rule in mid 80's the witdrawal rate is siginficantly higher while sending decreases. I assume in both of these methods unusal health cost is not included.
I find this reasearch article very interesting which also sugeest witdrawal rate during bad market. Try your own individual situation and may give you new perspective.

Jamal Karerat from India posted over 3 years ago:

Great study, and it will be useful as a starting point for implementing a practical withdrawal strategy after RMD implications are factored in. However, like others have pointed out, to be consistent with the classic 4% rule, the results need to be updated by appying inflation increment on the withdrawal amount.

Hope to see a revised version soon.

Edward Curtis from FL posted over 3 years ago:

Whatever the 4% rule is, the calculations should be made by adjusting requirements from year to year, both up and down. Certain elements of requirements, such as medical costs need to be adjusted by inflation plus a couple of points or even more. Others, like food and clothing should track inflation directly. Some expenses, such as mortgage payments may be flat and go to zero at payoff and still others, like travel and entertainment will undoubtedly go down. I have a rolling spreadsheet that forcasts individual future expenses based on current year actual data with an eye to historical trends and onetime expenditures. The individual components are automatically escalated as described above. Forecasting future market performance and inflation rates are a judgement call so I use a number of patterns based on history to produce an "envelope" of results within which I can expect to live.

I would very much like to see this methodology applied retroactively to a variety of 20 year actual patterns of security performance and corresponding inflation rates to create an evelope of results. This could be displayed as a collection of graphical patterns of portfolio value over time.

This is a great series of articles you have initiated and I urge that you continue.

Best regards from Ed in Maine and Florida.

Dave Gilmer from WA posted over 3 years ago:

I think you need to read a Morningstar article by Christine on "Clearing up confusion on the 4% Rule."

Clearly there are people who use the 4% rule on your portfolio value every year, as you indicate in this article, but this is not the classic definition, because it does NOT adjust your withdrawal DOLLARS for inflation. It is of course almost impossible to run out of money even taking 10% of your portfolio every year because you never actually run out of money - unless of course your balance gets below a nickel.

The rule starts by finding a dollar amount the first year and then adjusting the dollar amount up without regard to how much money you have left. Following the rule correctly of course means you can more easily run out of money!

Dave Gilmer from WA posted over 3 years ago:

As a matter of fact I ran a quick excel spreadsheet on a 10% withdrawal each year from a portfolio starting at $100,000 with a zero rate of return on the portfolio (just simple math.) After 100 years I still had $3 left, but it sure wasn't much to live off of for the last 85 years of so of the simulation.

This is why the article is not really very valuable as written and should be re-done with the proper formula, if it is to be useful.

johninreno from Nevada posted over 3 years ago:

I agree with HLM, "just keep the 4% withdrawal rate without the CPI adjustment".

It makes no sense to base your retirement on an arbitrary calculation(4%) and then compound the arbitrariness by annual adjustments using a politically-driven calculation(CPI).

The 4% rate has worked well for me since 2000 in spite of the 30% decline in 2008. When investment returns are greater than 4%, then the next years $amount goes up accordingly. In bad years, the $amount goes down. I don't know anyone who has reached retirement age without a major disruption to their income. We can deal with it.

Keep in mind that the withdrawal should be considered after tax or "take home pay". There is no correlation between the amount you withdraw and your income for tax purposes.


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