Sustainable Withdrawal Rates of Retirees: Is the Recent Economic Crisis a Cause for Concern?

Abstract

A sustainable standard of living at retirement is an issue of great importance for most retirees, and is certainly a major consideration in the allocation of client portfolios for private wealth managers. This study uses historical returns and incorporates boot strapping techniques to determine the safe withdrawal rates for retiring households between 1990 and 2005. This time period is chosen because it captures the market shock at the beginning of this millennium as well as the global economic downturn of 2007-2008. The results of this study indicate that while 3% and 4% withdrawal rates are sustainable in most cases, a 5% withdrawal rate is not sustainable for recent retirees given the conventional 60/40 asset allocation strategy.

Keywords: Financial Planning, Retirement Planning, Sustainable Withdrawal Rates, Wealth Management, Asset Allocation, Portfolio Management

JEL Classification: D14, G11, G17, J14