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Petsis Posts- Safe Withdrawal Rates in Retirement

| December 18, 2019

For many, the mystery of retirement income is how do we turn our 401(k) plans into a paycheck to supplement our social security, rental and/or pension income. Many hire a trusted advisor to assist them in this endeavor.

Many choose to take X amount out of their portfolio on a monthly basis. I am not a big fan of taking fixed systematic withdrawals (long story, another post) prorated from each position of a portfolio but for those that are, here is a chart from Dr. Wade Pfau’s Research on portfolio success rates given a certain asset allocation, withdrawal rates, and allocation of stocks (S&P500 fee-less index) to intermediate government bonds. Across the top, we have withdrawal rates. On the side, we can see success rates over certain horizons given a certain exposure to stocks ie: S&P500 index.

For those who don’t want to run out of money it is important to consider the realistic withdrawal rates of a portfolio and the probability of that portfolio being successful over certain time periods. Most advisors gravitate towards a 60/40 or 50/50 allocation because we know the probability of a client taking 4% withdrawals over 30 years succeeds, over historical trials, "100%" of the time in these simulations. More aggressive or conservative portfolios or higher withdrawal rates could fall short of this mandate.