Beyond the 4% rule: Improving your safe retirement withdrawal strategies

financialpost.com:

By Fraser Stark

The four per cent rule. The 3.3 per cent rule. The 2.26 per cent rule. Whatever your number, over time, these prescribed income level rules of thumb seem to point to lower — and more precise — values.

They all strive to answer the same challenging, timeless question: How much can I safely withdraw from my retirement portfolio each year without the risk of running out of money?

“Running out” is seen as a clear failure, and correctly so. But the premise of these rules is that the opposite — not running out — constitutes success. This is where the logic behind these rules begins to fray.

Evolved thinking around the methodology, updated long-term macroeconomic forecasts and more sophisticated modelling tools are changing how experts evaluate these rules. But honing in on the “correct” value misses the point: the entire premise of holding a basket of assets and drawing from it blindly is a suboptimal approach that often leads to inefficient outcomes for retired investors.

Financial adviser Bill Bengen’s seminal 1994 paper arrived at a safe withdrawal rate of four per cent by back-testing various withdrawal levels against historical market return data back to the 1920s. His analysis determined that an investor who started spending four per cent of their original portfolio value and raised the withdrawal rate by three per cent annually for inflation would have not fully depleted their balanced portfolio over any 30-year period.

Bengen’s approach was to trial-and-error using historical data, but it rests on a simple theoretical foundation.

If an investor wants to be assured they can withdraw an income each year, held constant for inflation, no matter how long they live, they must maintain their account balance