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By Thomas G. Ferrara

One of the toughest questions a retiree faces is “How much can I safely withdraw per year from my retirement savings?” No retiree wants to be faced with outliving their money if they depend on those assets to draw monthly income. There is no perfect answer!

However, there are some studies that have been done that can help guide your decision.

The Studies

In 1973, Harvard University did a study to determine how much they could safely withdraw from their endowment fund without eroding the principal. Assuming a portfolio of 50% stocks and 50% bonds and cash, Harvard’s analysts calculated they could withdraw 4% the first year and then adjust the subsequent year’s withdrawals for inaction.

Dallas Morning News columnist Scott Burns has written extensively on a “safe” withdrawal study by three Trinity University (San Antonio, TX) researchers. The Trinity Study measures the “success rate” of various portfolios from 1926 to 1995. The “Success rate” is the percent of time a retiree could sustain a given withdrawal rate without depleting his retirement assets.

One portion of the Trinity study adjusted withdrawals for inflation/deflation, much like the Harvard study. This analysis showed that of the portfolios considered, the optimal asset mix is 75% stock/25% long-term corporate bonds. For a 30-year payout period and a 4% withdrawal rate, this mix had a 98% success rate. At a 3% withdrawal rate, the 75/25 mix had a 100% success rate. Interpolating these results would give you a “safe” withdrawal rate of slightly less than 4%, virtually identical to the Harvard study.

In 1997, A San Diego-based financial planner, William Bengen, looked at year- by-year returns since 1925 for a 50/50 stock/bond portfolio. He assumed half the portfolio was in the S&P and half in intermediate-term government bonds. Using a 30-year holding period, he calculated that a 4.1% withdrawal rate would allow you to survive the worst market declines.

The Consensus, though 4% per year, seems to be the general rule. How should one interpret these studies?

The first thing to consider is that these studies are based on investment returns before expenses. If you’re paying an investment advisor an annual fee of 2% of assets and he has you invested in no-load mutual funds with a 0.5% expense ratio, your annual expenses are 2.5%. Your “safe” withdrawal rate is 4.0% – 2.5% = 1.5%. This may be the best reason yet to seek out “low-fee” investments.

Another consideration is that most of these studies are based on historical data. The new print here should read “past performance does not guarantee future results”. While there is every reason to believe that investment returns in the next 70 years will be similar to the previous 70 years, there’s little chance it will be exactly the same. To say that 4.0% is a “safe” withdrawal rate and that 4.1% will leave you broke implies a measure of accuracy in the forecast that just isn’t there. It may make more sense to say that the “safe” withdrawal rate going forward lies somewhere in the range of 3.25% to 4.25%. For my own planning, I’m using a somewhat narrower range of 3.5% to 4.0%.

An article in the Wall Street Journal (March 1, 2013) indicates that as economists are re-running Monte Carlo simulations and factoring in the more recent market results, a lower withdrawal rate closer to 2.5% to 3.% may be a more reasonable expectation.

Not Outliving One’s Income

So what is a person to do to find reasonable income they cannot outlive?

Annuity products and programs can provide that answer. In simplest of terms, a lump sum payment (premium) is given to an institution by an individual. In exchange for that lump sum, is the promise of a lifetime or period certain of payments to the person receiving the funds (the annuitant). The income received or withdrawal is based on:

  • Age
  • Interest (the older you are the higher the rate of payout)
  • The Guaranteed Payment Period (Lifetime, 10 yrs., 20 yrs., etc.)

Annuities are available through insurance companies and certain charitable institutions like Calvary Hospital, as a “charitable gift annuity”. If you go to Calvary’s website, www.calvaryhospital.org, you will find the following description:

A gift annuity is a written contract established when you give Calvary assets (cash or securities) in exchange for life-long xed income payments. The amount you receive depends on your age at the time you make the gift and the date the income payments begin. Typically, the older you are the more favorable the terms of the payout. One or two people can receive the income payments; and the donor need not be the income beneficiary. It is possible to select the time you wish to start the income payments. If you choose to start them right away, then it is called an immediate charitable gift annuity. When you decide to delay the payments which can increase the payout amount once payments begin, it is called a deferred charitable gift annuity.

By properly diversifying your investments and through use of an annuity payout, whether charitable, commercial, or a combination of the two, one can safely withdraw a respectable amount of money, annually, for the rest of one’s life.