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A 1% Increase In Initial Retirement Withdrawal Percentage Can Reduce Portfolio Survival By 10 Years

This is my second Instablog on withdrawal rate impact to portfolio survivability.

Many investment advisors recommend an initial 4% withdrawal so that over a 30 to 35 year retirement timeframe the retiree can maintain a fixed standard of living (live within a fixed budget). This methodology provides a 90% chance of not running out of money to pay living expenses. Increasing the withdrawal rate by just 1% can reduce the portfolio survivability by ten (10) years. I am 59 and what I will show below the results for 250 hypothetical market simulations of a simplified retirement portfolio from the Fidelity retirement income planner starting when I am age 60 (early retirement goal age). This model simulation is a conservative approach with most of the retirement variables fixed such as constant retirement income purchasing power, fixed expenses (budget), inflation fixed at 4.2% (30 year average), dividends at 2% yield (S&P 500 average), social security starting at age 66 and three pensions starting at age 60 (one pension has a cost of living adjustment and the other two are a reduced payment for early retirement starting at age 60 vice 65 and no cost of living adjustments) along with a 50%/50% mix of stocks and bonds (my real asset mix is currently 87%/13% with a dividend yield of 4.8%). The simulation assumes tax efficient withdrawals from the various savings accounts.

The retirement income estimator model has the user insert their needed income in retirement as well as all of the person's retirement financial data prior to performing the calculations. In the example shown I inserted my current salary and then iterated the results until my forecasted liquid assets were depleted to zero for simulation one at age 95 and simulation two at age 85. The result in each case was to maximize my retirement income each year. I am fortunate in that my accumulated assets will allow me to draw about 1% more than my current salary, so this skews the starting rate of withdrawal slightly beyond 4%.

Maximizing Lifestyle from age 60 to age 85

Based on the results of this conservative simulation, that was designed to not run out of income from age 60 to 95 (left withdrawal percentage column in the table), a person may be depriving themselves of a better lifestyle in their 60's and 70's due to the possibility of living to 95 or older. For example, so far no one in my family has lived to be older than 83. Fifty percent (50%) of males who retire at age 65 pass away prior to age 74 and women at age 76.

Shown below are the results for your review and comparison to your own savings needs. The results should scale to any income desired. The initial withdrawal was increased from $100K to $113K (13%) to improve life style from age 60 to 85. This change increases the initial withdrawal rate by only 1%, but the results are that the liquid portion of the portfolio is depleted ten (10) years sooner (age 85 vice 95) causing the remaining retirement years age 85 to 95 to be at a 52% reduction of initial purchasing power (only pensions and social security remain). In my particular case I should still be able to have a fair lifestyle with the reduced income during this time frame by minimizing my transportation costs and discretionary expenditures (I will not be driving or going anywhere).

Assume $100K starting income for ease of scaling to any retirement income. Income in this second example is increased 13% to $113K for the time period age 60 to 85 to improve early retirement lifestyle (withdrawal results are shown in right column).

Year Age % Withdrawals from total asset base

2014 61, 4.92%, 5.89%

Since 2014 is 1 year away model adds 1 year inflation and asset excess withdrawal.

2015 62, 5.16%, 6.25%

2016 63, 5.38%, 6.58%

2017 64, 5.63%, 6.96%

2018 65, 5.73%, 7.13%

Age 65 - Income requirements @4.2% inflation are now 1.18 times starting income ($118K/$133K).

2019 66, 4.70%, 6.21%

2020 67, 4.66%, 6.24%

2021 68, 4.85%, 670%

2022 69, 4.96%, 6.96%

2023 70, 4.94%, 7.84%

Age 70 - Income requirements @4.2% inflation are now 1.42 times starting income ($142K/$160K).

2024 71, 5.73%, 9.26%

2025 72, 5.95%, 10.66%

2026 73, 6.19%, 11.30%

2027 74, 6.04%, 12.80%

2028 75, 6.95%, 13.45%

2029 76, 7.72%, 15.70%

2030 77, 8.68%, 18.70%

2031 78, 8.69%, 21.22%

2032 79, 9.63%, 25.49%

2033 80, 9.31%, 23.52%

Age 80 - Income requirements @4.2% inflation are now 2.20 times starting income ($220K/$248K).

2034 81, 9.87%, 27.96%

2035 82, 11.38%, 41.63%

2036 83, 11.93%, 54.36%

2037 84, 12.33%, 110.37%

2038 85, 16.07% Liquid Funds depleted

(Income from 85 to 94 will be approximately 52% less)

2039 86, 16.68%

2040 87, 16.44%

2041 88, 19.12%

2042 89, 20.36%

2043 90 24.84%

Age 90 - Income requirements @4.2% inflation are now 3.32 times starting income ($332K).

2044 91, 28.45%

2045 92, 39.04%

2046 93, 62.11%

2047 94, 110.72%

Liquid Funds depleted

Expenses @4.2% inflation are now 3.91 times starting income ($391K).

Summary and Conclusions

The main purpose of this analysis was the maximize lifestyle options during the most productive retirement years and to minimize it for the sedentary years (high probability that I will not live beyond age 85). The income simulation was iterated maximizing income without depleting the portfolio prior to age 85. It just so happens that only a 1% increase of initial withdrawal rate results in this outcome. The example shows that increasing withdrawal rate by 1% reduces portfolio survivability by ten (10) years.

In both these examples, income is constant until the portfolio is exhausted. This allows the saver to determine if they have saved enough to cover living expenses throughout retirement. The Fidelity Retirement Income Planner model offers a variable income function that allows the user to vary expenses and time periods to totally customize the simulation for one time expenditures, lifestyle expenses and the alike.

I wish you good health, wealth and the time to enjoy it.