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Sustainable withdrawal rates from your retirement portfolio
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SEE PROFILESustainable Withdrawal Rates From Your Retirement Portfolio
Philip L. Cooley,1 Carl M. Hubbard2 and Daniel T. Walz3
This study reports the effects of a range of nominal and inflation-adjusted withdrawal rates appliedmonthly on the success rates of retirement portfolios of large-cap stocks and corporate bonds forpayout periods of 15, 20, 25, and 30 years. A portfolio is deemed a success if it completes thepayout period with a terminal value that is greater than zero. Using historical financial market
returns, the study suggests that portfolios of at least 75% stock provide 4% to 5% inflationadjusted
withdrawals.
Key Words: Retirement planning, Retirement wealth adequacySpecifying a sustainable withdrawal rate is an
important factor to consider in retirement investment
planning. The question we address is what percentage
withdrawal rate applied to the initial value of aretirement portfolio can be sustained through a payout
period? This is an important question since higher
withdrawal rates produce greater retirement income
from a given portfolio for a more attractive standard ofliving but are sustainable only for shorter payout
periods. Lower withdrawal rates reduce the risk ofrunning out of funds but provide less retirement
income from the portfolio.
Thus an investor
approaching retirement is faced with the task ofevaluating a range of alternative withdrawal rates
combined with different portfolio asset allocations andpayout periods to analyze their combined effects on
retirement income and the survivability of a retirement
portfolio.
The sustainable withdrawal rate problem has beenaddressed recently by Bierwirth (1994), Bengen (1994,
1996, 1997), Ferguson (1996), and Cooley, Hubbard,
and Walz (1998). In this paper, we extend the work of
Cooley, et a.l, (1998) by assuming monthly
withdrawals of retirement income and monthly
accruals of portfolio returns. We also update theanalysis to include security returns through December
1997. Our analysis examines the effects of bothnominal (constant percentage) withdrawals andinflation-adjusted withdrawals with different asset
allocations on the success rates of retirement portfolios.
A portfolio is identified as successful if it completes
the payout period with a terminal value of zero or
greater. Thus we assume that the investor is quite
willing to consume principal but wishes to avoid
exhausting the retirement portfolio prematurely.

Of course, different investors have different goals.
Some plan to leave substantial amounts of theirportfolios to heirs.
However, the purpose ofwithdrawal rate analysis is to provide investors with aplanning tool that can be used to evaluate thesustainability of various withdrawal rates. Clearly
investors who wish to leave an estate must plan towithdraw a lower percentage annually from theirportfolios than those who plan to consume most of theprincipal. Our analysis is presented so that investors
can determine the range of withdrawal rates that is
likely to achieve their goals.
Literature Review
In recent years, several studies have investigated theeffects of asset allocation and withdrawal rates on theability of portfolios to sustain retirement income.
Much of this research has taken the form of shortarticles in the popular press suggesting asset allocations
or withdrawal rates for retirement portfolios based on
personal or professional experience. For example,
Peter Lynch argues in a 1995 Worth Magazine article
that based on his professional experience andknowledge of markets, a retirement portfolio with atleast a 50% equity allocation would generally be able
to sustain a 7% annual withdrawal rate. Scott (1996)
developed tables indicating the combinations between
the retirement portfolio withdrawal rate and theportfolio’s rate of return that result in portfolio
exhaustion for different retirement periods. She foundthat earning a higher return dramatically increases theallowable withdrawal rate, indicating that many
investors should consider increasing the equity
allocations of their retirement portfolios.

1. Philip L. Cooley, Prassel Professor of Business Administration, Department of Business Administration, Trinity University, 715 Stadium Dr., San
Antonio, TX 78212. Phone: (210) 999-7281. Fax: (210) 999-8134. E-mail: pcooley@trinity.edu.

2. Carl M. Hubbard, Professor of Business Administration, Department of Business Administration, Trinity University, 715 Stadium Dr., San
Antonio, TX 78212. Phone: (210) 999-7238. Fax: (210) 999-8134. E-mail: chubbard@trinity.edu
3. Daniel T. Walz, Professor of Business Administration, Department of Business Administration, Trinity University, 715 Stadium Dr., San Antonio,
TX 78212. Phone: (210) 999-7289. Fax: (210) 999-8134. E-mail:dwalz@trinity.edu

Sustainable Withdrawal Rates

Other studies have taken a more academic approach.
Ho, Milevsky, and Robinson (1994) developed ananalytical model to determine the optimal allocation
between a risky and risk-free asset in order to minimize
the probability that withdrawals will prematurely
exhaust a retirement fund. Using historical returns
from Canadian equities and treasury bills, they
concluded that retirement funds should have asignificantly larger allocation to equities than arguedby conventional wisdom.
Using actual U.S. historical returns for various asset
classes, Bierwirth (1994) calculated terminal portfolio
values at the time of retirement. He found that thetiming of returns affects retirement portfolio value assignificantly as differences in mean returns. He
illustrated the profound effect that a market“catastrophe” can have on long-term portfolio values.
In three subsequent studies, Bengen (1994, 1996, 1997)
dramatically extended Bierwirth’s original research.
Using annual returns data published by Ibbotson
Associates, Bengen (1994) found that a retirement
portfolio with a 50% equity-50% long-term bondallocation is able to sustain a 3% inflation-adjusted
withdrawal rate for any possible 30-year period startingin 1926. After examining alternative asset allocations
and withdrawal rates, Bengen concluded that if themarket behaves in the future the way it has in the past,
the typical retirement fund should have a 50-75%
equity allocation, which would allow a 4% inflationadjusted withdrawal rate for 35 years.
In his second study, Bengen (1996) extended his firststudy in several ways. Noting that his experience isthat most investors are uncomfortable having theirretirement fund invested 50-75% in equities, heinvestigates the effect of portfolio rebalancing during
retirement on the ability of the retirement portfolio tosupport a minimum of 4% annual withdrawal rate. He
found that lowering the equity composition of theportfolio by 1 percentage point each year does not
significantly reduce the retirement portfolio’s ability tosupport 4% or higher withdrawal rates. However
diminishing the equity composition by 2 or 3
percentage points each a year does significantly
diminish the portfolio’s ability to support 4% annual
withdrawal rates over a 35 year planning period.
Bengen's (1997) third study on this topic built on his
previous work in several interesting ways.
He
analyzed the issue of sustainable withdrawal rates
using quarterly portfolio returns instead of annual

returns. He also included small-cap stocks and U. S.
Treasury bills as well as larger equities and long-term
U. S. Treasury bonds in hypothetical retirement
portfolios. He found that initiating withdrawals at
different quarters of the year did not significantly
change his prior findings regarding withdrawal rate or
the optimality of a 50-75% equity allocation. He
concluded that investing in U. S. Treasury bills rather
than longer term Treasury bonds slightly reduces theportfolio’s ability to sustain the initial 4% annual
withdrawal rate. He also found that investing up to
about 50% of a portfolio's equity allocation in smallcap stocks and the remainder of the equity allocation inlarge-cap stocks increased a sample portfolio’s ability
to sustain high withdrawal rates over a longer time
period.
Ferguson (1996) took an alternative tack and assumed
that investors plan to leave the principal value of theretirement portfolio to heirs. The withdrawal plan heproposed involves consuming dividend income only
from an equity-heavy portfolio. He suggested that a
withdrawal rate of approximately 3% of the portfolio
value would allow such a portfolio to retain its realvalue in the long run. The author cautioned thatwithdrawal plan that sustains the real value of aretirement portfolio restricts a retiree to a lower
standard of living than withdrawals that ultimately
consume the principal.
Using the same Ibbotson Associates (1996) data,
Cooley, Hubbard, and Walz (1998) extended Bengen’s
work in several directions. They investigated theeffects of a wide range of withdrawal rates (3 to 12%)on terminal values of portfolios through overlapping
payout periods of 15, 20, 25, and 30 years. They also
examined the most recent 50-year period (1946-1996)
as well as the entire database (1926-1996) of large-cap
stock and corporate bond market returns. Cooley, etal., found that a minimum allocation of 50% in equities
is necessary to support withdrawal rates of 4% or more
per year. In fact, they found that for shorter payout
periods (15 years or less) withdrawal rates of 8%-9%
are sustainable. They also found that inflationadjusting the withdrawal rates dramatically lowers
present consumption relative to future consumption.
Data and Methodology
The principal objective of our analysis is to calculate
retirement portfolio success rates for various monthly
withdrawal rate assumptions and various portfolio asset
allocations for the 1926 to 1997 period and for the
post-war 1946 to 1997 period. A portfolio of stocks©1999, Association for Financial Counseling and Planning Education. All rights of reproduction in any form reserved.

41

Financial Counseling and Planning, Volume 10(1), 1999

and bonds is deemed successful at the end of an n-year
payout period if its terminal value after withdrawals is
positive. The terminal value of a portfolio in theanalysis is the value per $1,000 after reinvestment at
actual historical monthly rates of return and aftermonthly withdrawals.
The advantage of the portfolio success rate
methodology is in the ability of the reader to scan arange of success rates relative to withdrawal rates,
portfolio asset allocations, and years of payout. Since
no methodology can specify an optimal withdrawal rate
and portfolio allocation for investors, it is important topresent the risk-return tradeoffs in the withdrawal ratedecision in a manner that facilitates retirement
investment planning.
In planning our study, we considered using life
expectancies from various retirement ages as thenumbers of years in the payout periods. Since
retirements tend to occur between the ages of 55 and70, the number of different life expectancies for men
and women would substantially increase the number ofcalculations and tables to report. We concluded thatthe more general approach of providing success rates
for 15 to 30 years in 5-year increments would allow thereader to determine which is most applicable to him orher.
As in earlier studies, the monthly data on financial
market returns were provided by Ibbotson Associates(1998). The stock returns in the analysis are totalmonthly returns to the Standard & Poor's 500 Index.
Corporate bond returns are total monthly returns
calculated from the Salomon Brothers Long-Term
High-Grade Corporate Bond Index and Standard &Poor's monthly high-grade corporate composite yielddate. Returns for U. S. Treasury bills are 30-day
returns reported by Ibbotson Associates. Monthly
portfolio returns, month-end values, and month-end
values after withdrawals are calculated for overlapping
15, 20, 25, and 30-year periods from January 1926
through December 1997. In that 72-year period there
are 58 overlapping 15-year payout periods, 53
overlapping 20-year payout periods, 48 overlapping
25-year payout periods, and 43 overlapping 30-year
payout periods.
Calculations of monthly portfolio returns implicitly
assume rebalancing of portfolios each month to thedesired allocation of stock and bonds. Annual inflation
rates used in adjusting annual withdrawals are

42©1999, Association for Financial Counseling and Planning Education.

calculated from the consumer price index (CPI-U) for
1926 through 1996 published by Ibbotson Associates.
Month-end portfolio values that determine portfolio
success rates after nominal withdrawals are calculated
as follows:
Vt = Vt-1(1 + Rt) - Wt

(1)

in which Vt is the remaining value of the portfolio at
the end of month t, Vt-1 is the value of the portfolio atthe beginning of the month net of the previous month’s
withdrawal, Rt is the rate of return on the portfolio formonth t, and Wt is the amount withdrawn from theportfolio at the end of the month.
Month-end portfolio values that determine portfolio
success rates after inflation-adjusted withdrawals arecalculated as follows:
Vt = Vt-1(1 + Rt) - Wt(CPIY-1/CPI1925)(2)

in which the variables are defined as in Equation (1)except (CPIY-1/CPI1925) is the inflation adjustment foreach year's (Y) monthly withdrawals. By multiplying
the ratio of the previous year's consumer price index
for urban consumers (CPIY-1) to the 1925 value of the
CPI, the investor maintains the purchasing power ofmonthly withdrawals with a one-year lag. Lagging the
inflation adjustment enables the hypothetical investor
to adjust monthly withdrawals by a known rate of
inflation.
Some investors may choose to withdraw funds at the
beginning of the month, but that simply scales back theinvestment capital by one month's withdrawal. In thatcircumstance the withdrawal rates in Tables 1 through5 would apply to the reduced investment capital after
the first withdrawal. Also, our results would beunchanged by the end-of-month versus beginning-ofthe-month timing decision if the actual investment of
retirement funds occurs one month prior to the initial
beginning of the month withdrawal.
The portfolio success rates in Tables 1, 3, and parts ofTable 5 were developed using Equation (1) to calculateterminal values of portfolios and are the result ofconstant percentage withdrawals through the payout
periods without adjustment for inflation. The portfolio
success rates in Tables 2, 4, and parts of Table 5
assume that monthly withdrawals are inflation-adjusted
and are the result of portfolio terminal values
calculated with Equation (2). That is, the investor is
All rights of reproduction in any form reserved.

Sustainable Withdrawal Rates

assumed to initiate withdrawals at a specificwithdrawal rate and then adjust each subsequent year’s,
thus month's, withdrawal amount by the previous
year’s percentage change in the consumer price index.
The objective of inflation adjustment in Equation (2) is
to maintain the purchasing power of the monthly
withdrawal amount.
As an alternative to the portfolio success rate analysis,
we revised the methodology so that the withdrawal rateis the open-ended variable rather than the terminal
value of the portfolio. We constrain the terminal valueof the portfolio to decline to zero just at the end of thelast month of the n-year payout period. We thencalculate withdrawal rates, nominal and inflationadjusted, that are consistent with the zero terminal
value assumption for the overlapping 15 year, 20 year,
25 year, and 30 year payout periods for 1926 through1997 and for 1946 though 1997. Means, medians,
standard deviations, minimums, and maximums of thewithdrawal rates that just exhaust the portfolios arepresented in Table 6.
Analytical Results
Table 1 reports the portfolio success rates of nominal
or constant monthly withdrawals ranging from 0.25%
per month (3% annualized) to 1.0% per month (12%annualized) for annual overlapping periods from 1926
through 1997. As described above, the payout periods
vary from 15 to 30 years in increments of 5 years, andasset allocations vary from 100% stocks to 100%
corporate bonds in increments of 25%. Table 2 issimilar to the analysis in Table 1 except thewithdrawals are inflation-adjusted annually.
The portfolio success rates in Tables 1 and 2 allow aninvestor to evaluate the likely success of an initialwithdrawal rate. For example, if an investor expected a
20-year payout period after retirement and was willingto accept a 75% success rate, he or she could select the
8% annualized withdrawal rate for nominal
withdrawals and an asset allocation of at least 50%
stock. If the investor planned to adjust withdrawals for
inflation, the portfolio success rates reported in Table 2
justify 6% initial withdrawals from portfolios that arecomposed of at least 50% stock.
The portfolio success rates in Tables 3 and 4 arederived from post-war (1946-1997) monthly returns
and withdrawals. Since the catastrophic events of theGreat Depression of the 1930s and World War Two are
not likely to be repeated, the post-war data allows theanalysis of withdrawal rates and resulting portfolio

success rates with market returns data that may be
more relevant for the future. Tables 1 and 3 assume
nominal withdrawals and are therefore comparable.
Tables 2 and 4 report the effects of inflation-adjusted
withdrawals.
The high financial market returns of the 1980s andmid-1990s improve the post-war portfolio success rates
reported in Table 3 when withdrawal rates are notinflation adjusted. For a 20-year payout period and atolerance of 25% failure (75% success), 9% is a viablewithdrawal rate for the investor who maintains a 100%
stock retirement portfolio. A withdrawal rate of 8% is
successful if the investor maintains a portfolio of atleast 50% stock.
If the investor plans to adjust withdrawals for inflation,
the post-war analysis in Table 4 implies lower
withdrawal rates. If the investor with a 20-year payout
period prefers a 75% success rate or greater, he or she
will limit the initial withdrawal rate to 5% and maintaina portfolio of at least 25% stock. A 6% withdrawal
rate with a 100% stock portfolio has a 73% chance of
success for a 20-year payout..
Recommended portfolio asset allocations often include
an investment in near-cash assets such as U. S.
Treasury bills. Table 5 reports the portfolio successrates for a portfolio of 60% stock, 30% bonds, and 10%
treasury bills (60/30/10) for 1926 through 1997 and forthe post-war period of 1946 through 1997.
The success rates for the 60/30/10 portfolio in Table 5
are comparable to the 50% stock/50% bonds portfolios
in Tables 1 through 4 for nominal withdrawal rates. In
the inflation-adjusted analyses, the comparability is not
as clear, but the 60/30/10 and 50% stock/50% bonds
portfolios provide very similar results.
The portfolio success rates reported in Tables 1through 5 are equivalent to those reported in Tables 1through 3 in Cooley, et al., (1998) for annualized
withdrawal rates of 3% to 7%. For the higher
withdrawal rates of 8 to 12%, portfolio terminal values
appear to decline faster when the withdrawals aremonthly. The comparatively lower portfolio successrates with monthly withdrawals are consistentregardless sample years or inflation adjustment. The
analysis of monthly returns and withdrawals in Tables
1 through 4 suggests that choosing a withdrawal rate of
8% or greater is somewhat riskier than portrayed in
Cooley, et al., (1998), which relies on annual returns
and assumes annual withdrawals.

©1999, Association for Financial Counseling and Planning Education. All rights of reproduction in any form reserved.

43

Table 1
Portfolio Success Rate with Monthly Withdrawals: 1926 to 1997
(Percent of all past payout periods supported by the portfolio)
Annualized Withdrawal Rate as a % of Initial Portfolio Value
3%

4%

5%

6%

7%

8%

9%

10%

11%

12%

100
100
100

98
98
98

96
96
95

94
92
91

91
88
84

83
75
74

72
58
60

58
44
49

45
38
37

40
29
33

100
100
100

100
100
100

100
98
98

96
96
95

94
90
88

83
73
63

68
50
51

51
40
35

38
29
26

30
19
14

20 years
25 years
30 years
25% Stocks/75% Bonds

100
100
100

100
100
100

100
100
100

100
100
98

98
94
81

83
58
42

55
35
19

36
13
5

17
2
0

4
0
0

20 years
25 years
30 years
100% Bonds

100
100
100

100
100
100

100
100
100

100
100
95

100
60
21

62
17
5

23
6
0

11
0
0

4
0
0

0
0
0

20 years
100
100
100
91
47
36
15
25 years
100
100
96
48
29
8
2
30 years
100
100
53
26
2
0
0
20 years = 53 overlapping periods; 25 years = 48 overlapping periods; 30 years = 43 overlapping periods
Results for 15 years are available from the authors.

4
0
0

0
0
0

0
0
0

Payout Period
100% Stocks
20 years
25 years
30 years
75% Stocks/25% Bonds
20 years
25 years
30 years
50% Stocks/50% Bonds

Table 2
Portfolio Success Rate with Inflation Adjusted Monthly Withdrawals: 1926 to 1997
(Percent of all past payout periods supported by the portfolio)
Annualized Withdrawal Rate as a % of Initial Portfolio Value
Payout Period
100% Stocks
20 years
25 years
30 years
75% Stocks/25% Bonds
20 years
25 years
30 years
50% Stocks/50% Bonds
20 years
25 years
30 years
25% Stocks/75% Bonds
20 years
25 years
30 years
100% Bonds
20 years
25 years
30 years

3%

4%

5%

6%

7%

8%

9%

10%

11%

12%

100
100
100

100
100
98

91
85
81

77
69
65

66
56
56

57
42
44

42
33
33

32
29
33

28
25
19

19
15
7

100
100
100

100
100
100

94
85
86

77
65
63

66
50
47

51
33
35

38
25
14

19
13
7

17
4
0

6
0
0

100
100
100

100
100
95

92
79
70

75
52
51

55
31
19

30
15
9

17
4
0

9
0
0

2
0
0

0
0
0

100
100
100

100
96
74

89
48
26

51
19
19

28
17
7

15
6
0

9
0
0

4
0
0

0
0
0

0
0
0

100
100
79

96
52
19

57
19
16

23
15
12

15
10
0

13
0
0

9
0
0

0
0
0

0
0
0

0
0
0

20 years = 53 overlapping periods; 25 years = 48 overlapping periods; 30 years = 43 overlapping periods
Results for 15 years are available from the authors.

Sustainable Withdrawal Rates

Table 3
Portfolio Success Rate with Fixed Monthly Withdrawals: 1946 to 1997
(Percent of all past payout periods supported by the portfolio)
Annualized Withdrawal Rate as a % of Initial Portfolio Value
3%

4%

5%

6%

7%

8%

9%

10%

11%

12%

100
100
100

100
100
100

100
100
100

100
100
100

100
100
100

94
82
83

79
57
61

61
39
48

45
39
43

45
29
35

20 years
25 years
30 years
50% Stocks/50% Bonds

100
100
100

100
100
100

100
100
100

100
100
100

100
100
100

94
79
65

73
46
48

48
36
35

39
29
26

33
18
13

20 years
25 years
30 years
25% Stocks/75% Bonds

100
100
100

100
100
100

100
100
100

100
100
100

100
100
83

88
54
35

55
32
13

36
7
0

15
0
0

6
0
0

20 years
25 years
30 years
100% Bonds

100
100
100

100
100
100

100
100
100

100
100
96

100
50
9

52
14
0

21
4
0

9
0
0

6
0
0

0
0
0

18
4
0

3
0
0

0
0
0

0
0
0

Payout Period
100% Stocks
20 years
25 years
30 years
75% Stocks/25% Bonds

20 years
100
100
100
85
39
33
25 years
100
100
93
46
21
14
30 years
100
100
52
13
4
0
20 years = 53 overlapping periods; 25 years = 48 overlapping periods; 30 years = 43 overlapping periods
Results for 15 years are available from the authors.

Table 4
Portfolio Success Rate with Inflation Adjusted Monthly Withdrawals: 1946 to 1997
(Percent of all past payout periods supported by the portfolio)
Annualized Withdrawal Rate as a % of Initial Portfolio Value
Payout Period
100% Stocks

3%

4%

5%

6%

7%

8%

9%

10%

11%

12%

20 years
25 years
30 years
75% Stocks/25% Bonds

100
100
100

100
100
100

91
82
74

73
61
57

64
46
48

55
39
43

39
32
35

33
29
35

27
29
22

21
21
13

20 years
25 years
30 years
50% Stocks/50% Bonds

100
100
100

100
100
100

91
75
74

70
50
48

61
39
35

45
29
35

36
25
13

21
14
9

21
7
0

9
0
0

20 years
25 years
30 years
25% Stocks/75% Bonds

100
100
100

100
100
91

88
64
48

64
36
35

42
25
13

27
11
0

15
0
0

3
0
0

0
0
0

0
0
0

20 years
25 years
30 years
100% Bonds

100
100
100

100
93
65

82
36
9

48
4
0

21
0
0

0
0
0

0
0
0

0
0
0

0
0
0

0
0
0

20 years
25 years
30 years

100
100
91

100
54
0

58
4
0

9
0
0

0
0
0

0
0
0

0
0
0

0
0
0

0
0
0

0
0
0

©1999, Association for Financial Counseling and Planning Education. All rights of reproduction in any form reserved.

45

Financial Counseling and Planning, Volume 10(1), 1999
20 years = 53 overlapping periods; 25 years = 48 overlapping periods; 30 years = 43 overlapping periods
Results for 15 years are available from the authors.

46©1999, Association for Financial Counseling and Planning Education.

All rights of reproduction in any form reserved.

Sustainable Withdrawal Rates

Tables 1 through 4 report several counter-intuitive
portfolio success rates for 30-year payout periods in
portfolios of 75% and 100% stock with highwithdrawal rates. The tables report 18 instances where
portfolio success rates for 30-year payout periods are
greater than the success rates for 25-year payout
periods. If a withdrawal rate is not successful inproviding 25 years of retirement income, how can it besuccessful for 30 years? The explanation of theseresults has to do with the number of overlapping
payout periods of 25 years versus 30 years used in
calculating percentage success rates. The final five 30year payout periods do not begin on the same date as
the final 25-year payout periods and end 30 years later.
All of the overlapping payout periods end on
December 31, 1997. If the 25-year payout periods
were limited to 43 periods all beginning at the samemonth as the 30-year payout periods, the success ratesof the 30-year payout periods would be equal to or lessthan that of the 25-year payout periods. Thus theanomalous results in the 25-year and 30-year payout
periods are unfortunate byproducts of the overlapping
periods methodology adopted for this paper andapplied in most of the literature on this topic.
The analysis reported in Table 6 addresses the problemof withdrawal rates and portfolio success from adifferent perspective. For each n-year payout period ofmonthly historical returns, a withdrawal rate is
calculated that reduces the value of the portfolio to zero
just at the end of the last month of the payout period.
The means, medians, and other descriptive statistics ofthe marginally successful withdrawal rates for the 15,20, 25 and 30-year payout periods are reported in Table
6 for all months from January 1926 through December
1997 and also for January 1946 through December
1997. Part A of Table 6 reports nominal withdrawal
rates, and Part B reports inflation-adjusted withdrawal
rates. Only the 60/30/10 portfolio was considered in
the analysis reported in Table 6.
The figures in Table 6 suggest that risk neutral
investors who are willing to accept a 50% probabilityof portfolio success may plan to withdraw substantial
amounts. A similar conclusion could have been drawn
from Tables 1 though 5. However, Table 6 provides
convenient information on the distribution of
marginally successful withdrawal rates. For example,
the investor who plans on a 20-year payout period of
inflation adjusted withdrawals would examine thefigures in the lower right hand corner of the table. The

mean and median withdrawal rates are very close at
7.4% and 7.2%, and the minimum such rate is 4.9%.
SummaryThis paper reports the effects of withdrawal rates,
nominal and real, on success rates of retirement
portfolios of stocks and bonds. The financial market
returns used in calculating terminal values of portfolios
are monthly returns to large company stocks, highgrade corporate bonds, and 30-day U. S. Treasury bills
reported by Ibbotson Associates for January 1926
through December 1997. The analysis is repeated for
the January 1946 through December 1997 post-war
period. The findings are similar to those reported in
Cooley, et al., (1998). Monthly variations in stock andbond market returns plus monthly withdrawals appear
to reduce portfolio success rates for higher (8% +)withdrawal rates.
As Cooley, et al., (1998) concluded, investors who
expect long payout periods should choose an asset
allocation that is at least 50% common stock and alower withdrawal rate. Conversely, a higher
withdrawal rate appears to be sustainable for shorter
payout periods, such as 15 or 20 years, provided theportfolio has a substantial percentage of stocks.
Investors who plan to inflation adjust withdrawals
should choose lower withdrawal rates and invest atleast 50% of the portfolio in stocks. Finally, the lower
withdrawal rates of 3% and 4% recommended by someanalysts appear to be excessively conservative for
portfolios with at least 50% stock, unless the investor
wishes to leave a substantial portion of the initial
retirement portfolio to his/her heirs.
Since the choice of a withdrawal rate involves
individual preference for current consumption,
uncertainty of life expectancy, and variable financial
needs, there is no single globally optimal withdrawal
rate. Each investor must determine the appropriatebalance of the risk of running out of funds versus ahigher, more enjoyable standard of living early inretirement. Most authors tend to favor a moreconservative approach that virtually guarantees asubstantial positive terminal value of the retirement
portfolio. Such an approach exchanges post-retirement
quality of life for end of life financial security. Someretirees may prefer not to make that tradeoff. In the
final analysis the choice of a portfolio withdrawal rate,
within a reasonable range, requires very personal
choices that perhaps are beyond the scope of financial
analysis.

©1999, Association for Financial Counseling and Planning Education. All rights of reproduction in any form reserved.

47

Financial Counseling and Planning, Volume 10(1), 1999

Table 5
Portfolio Success Rates with Monthly Withdrawals from a Portfolio of 60% Stock, 30% Bonds, and 10% Treasury Bills(Percent of all past payout periods supported by the portfolio)
Annualized Withdrawal Rate as a % of Initial Portfolio Value
Payout Period
Unadjusted withdawals:
20 years
25 years
30 years
Inflation adjusted withdrawals:
20 years
25 years
30 years
Unadjusted withdawals:
20 years
25 years
30 years
Inflation adjusted withdrawals:
20 years
25 years
30 years

3%

4%

5%

6%

7%
8%
1926-1997

9%

10%

11%

12%

100
100
100

100
100
100

100
100
100

98
96
95

96
92
88

87
65
53

58
44
35

40
27
16

32
13
0

13
0
0

100
100
100

100
100
98

96
83
79

77
58
51

60
42
40
25
33
12
1946-1997

21
10
0

13
0
0

2
0
0

0
0
0

100
100
100

100
100
100

100
100
100

100
100
100

100
100
100

94
68
52

61
43
35

42
25
13

33
11
0

15
0
0

100
100
100

100
100
96

94
71
65

67
46
35

55
29
30

36
25
13

21
11
0

15
0
0

3
0
0

0
0
0

Table 6
Distributions of Portfolio Withdrawal Rates that Produce Terminal Portfolio Values of $0
Asset Allocation = 60% Stocks, 30% Bonds, 10% Treasury bills
A. Nominal monthly withdrawals
Payout periods, 1926-1997

Payout periods, 1946-1997

15 years

20 years

25 years

30 years

15 years

20 years

25 years

30 years

Mean

11.5%

9.8%

8.8%

8.4%

12.0%

10.1%

8.9%

8.5%

Standard deviation

2.3%

1.8%

1.5%

1.5%

2.3%

1.7%

1.3%

1.2%

Median

11.0%

9.5%

8.7%

8.2%

11.4%

9.6%

8.6%

8.1%

Minimum

6.9%

6.0%

5.4%

5.2%

8.9%

7.7%

7.3%

7.1%

Maximum

17.5%

13.9%

11.6%

10.9%

17.5%

13.9%

11.6%

10.8%

B. Inflation-adjusted monthly withdrawals
Payout periods, 1926-1997
15 years

20 years

25 years

Payout periods, 1946-1997
30 years

15 years

20 years

25 years

30 years

Mean

9.5%

7.6%

6.7%

6.2%

9.5%

7.4%

6.3%

5.9%

Standard deviation

2.2%

1.8%

1.6%

1.4%

2.4%

1.9%

1.8%

1.5%

Median

9.4%

7.5%

6.5%

6.1%

9.3%

7.2%

5.7%

5.3%

Minimum

6.0%

4.9%

4.3%

4.0%

6.0%

4.9%

4.3%

4.0%

Maximum

14.4%

11.3%

10.0%

8.9%

14.4%

11.3%

10.0%

8.9%

48©1999, Association for Financial Counseling and Planning Education.

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Sustainable Withdrawal Rates©1999, Association for Financial Counseling and Planning Education. All rights of reproduction in any form reserved.

49

Financial Counseling and Planning, Volume 10(1), 1999

References
Bengen, W. P. (1994). Determining withdrawal rates using
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Bengen, W. P. (1996). Asset allocation for a lifetime.
Journal of Financial Planning, 9(3), 58-67.
Bengen, W. P. (1997). Conserving client portfolio during
retirement, part III.
Journal of Financial Planning,
10(5), 84-97.
Bierwirth, L. (1994). Investing for retirement: using thepast to model the future. Journal of Financial Planning,
7(1), 14-24.
Cooley, P. L., Hubbard, C. M. & Walz, D. T. (1998).
Retirement spending: choosing a sustainable withdrawal
rate. Journal of the American Association of Individual
Investors, 20(2), 16-21.

50©1999, Association for Financial Counseling and Planning Education.

Ferguson, T. W. (1996). Endow yourself. Forbes, 157(12),186-187.
Ho, K., Milevsky, M. & C. Robinson. (1994). Asset
allocation, life expectancy, and shortfall. Financial
Services Review., 3(2), 109-126.
Ibbotson Associates (1996). Stocks, bonds, bills, andinflation yearbook. Ibbotson Associates, Chicago, IL.
Ibbotson Associates (1998). Stocks, bonds, bills, andinflation yearbook (CD-ROM Version). Ibbotson
Associates, Chicago, IL.
Lynch, P. (1995). Fear of crashing. Worth 2(1), 79-88.
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Association of Individual Investors. 18(8), 8-11.

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Sustainable Withdrawal Rates

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CONTENTS
Issue 1
Directions for Research on Financial Counseling and Planning
Saving and Financial Planning: Some Findings from a Focus Group
Mandatory Financial Counseling for Bankrupts in Canada
The Role of Financial Counselors in Long-term Health Care Planning
Financial Planning for Retirement by Parents of College StudentsChildren's College As A Saving Goal
Adequate Emergency Fund Holdings and Family Type
Emergency Fund Levels: Is Household Behavior Rational?
A Model of Desired Wealth at Retirement
The Home as a Wealth Preserving and Accumulating Asset:A General Formulation and Balance Sheet
Application
Issue 2The Backward Art of Managing Money
Personal Finance Education for Employees: Evidence on the Bottom-line Benefits
What Consumers Look for in Financial Planners
Subjective and Objective Risk Tolerance: Implications For Optimal Portfolios
Does Risk Tolerance Decrease with Age?
Gender Differences in the Investment Decision-Making Process
Preretirees' Perception of Retirement Income
Value of Home Equity Used in Reverse Mortgages as a Potential Source of Income for Elderly Americans
Saving Motives and 401(k) Contributions
Income and Expenditures in Two Phases of Retirement
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