Sustainable portfolio withdrawal scenarios for 2022 retirees—three scenarios
Annual inflation-adjusted withdrawal rates (estimated for the 30 years ending 2052)
Notes: The sustainable withdrawal rate assumes a percentage withdrawal from the portfolio's initial balance that can be increased by the inflation rate over the 30 years starting in 2022. At this rate, the portfolio would avoid depletion over that period in 85% of all simulations.
Sources: Authors' calculations, based on data from the Survey of Professional Forecasters, Morningstar, Inc. (intermediate-term U.S. government bond returns), Kenneth French's Data Library (U.S. total stock market return), and Robert Shiller's website (CPI). Kenneth French's Data Library: mba.tuck.dartmouth.edu/pages/faculty/ken.french/data_library.html; Robert Shiller's website: econ.yale.edu/~shiller/data.htm.
A risk-management mindset for everyone
Of course, a forecast helps us identify a squall in advance so we can swerve, stall, or batten down the hatches, even when sunny skies might appear to prevail. "We have lived through a period of really strong markets. It's helpful to remember that these modified withdrawal rates would be applied to a portfolio whose balance has swelled during the bull market of the past 10 years," says Clarke.
Even more important, perhaps, is understanding that many investors and advisors use a systematic withdrawal rate not as a hard-and-fast rule, but as a jumping-off point. As the return outlook changes, they can slowly revise their withdrawal rate.
"The need to make sound financial decisions does not go away when folks retire. I might say it actually goes up because now they have to think about not outliving their portfolio, potentially leaving bequests, and changing return environments. I would encourage retirees and advisors to adopt a more strategic mindset toward managing these risks," says Khang.