Q. For many years you have suggested retirees can safely withdraw at a 4 percent rate from their savings. Many others make the same suggestion. But at what age do these withdrawals begin? And, if you start at 70 or 75 instead of 60 or 65, can you withdraw more? —A.R., Dallas, TX
A. The 4 percent safe withdrawal rate originated with financial planner William Bengen, about 20 years ago. That was when he used historical investment return data to measure the fail rate for different starting levels of portfolio withdrawals.
Since then there have been many variations on his original work but the standard used was having a 95 percent probability that your portfolio would produce the needed distributions for 30 years. That period allows a safety margin of 5 years over the joint life expectancy of a couple in their mid-60s.
So your question is a good one. By delaying retirement, the number of years you need to plan for might be lower. The question is: How much lower?
Another research project, usually called the Trinity Study, can tell us a little about that. Done by Trinity University faculty members Cooley, Hubbard and Walz, the study was reported in my column before publication as a paper in 1997.
The study explores survival rates for different portfolios. The portfolios range from 100 percent domestic stocks to 100 percent domestic bonds. The survival periods range from 15 to 30 years. Here are some of those findings:
- A portfolio that is 75 percent stocks, 25 percent bonds has a 100 percent survival rate for 15 years at withdrawal rates of 4 and 5 percent. The survival rate drops to 95 percent at a 6 percent withdrawal rate. For a 20-year period the survival rates for withdrawals of 4, 5 and 6 percent are 100, 90 and 75 percent, respectively. For a 25-year period the survival rates for withdrawals of 4, 5 and 6 percent are 100, 85, and 65 percent.
- A portfolio that is 50/50 stocks and bonds also has a 100 percent survival rate for 15 years at withdrawal rates of 4 and 5 percent.
The survival rate drops to 93 percent at a 6 percent withdrawal rate. For a 20-year period the survival rates for withdrawals of 4, 5 and 6 percent are also 100, 90 and 75 percent, respectively. For a 25-year period the survival rates for withdrawals of 4, 5 and 6 percent are 100, 80 and 57 percent, respectively.
Portfolios with 50 percent to 75 percent stocks were the sweet spot in this study. Portfolios with more than 75 percent stocks had lower survival rates. So did portfolios with more than 75 percent bonds.
What’s the bottom line? Those who choose to retire at age 70 or 75 might consider a 5 percent initial withdrawal rate, but a 6 percent rate would be pushing the odds. A 7 percent rate would be foolish.
Q. I am using the Couch Potato model. In regards to rebalancing, are there any special considerations? For example, is the x-dividend date important? —J.E., Dallas, Texas
A. There are larger items that come well before x-dividend dates if you are seeking portfolio efficiency. The big sources of cost in rebalancing a portfolio are (1) sales that create taxable events such as capital gains and (2) transactions that require commissions, such as mutual fund shares that are not commission free.
After that, portfolio efficiency also depends on whether the portfolio is in a qualified account or a taxable account. It also depends on whether you are in accumulation mode— adding new cash— or distribution mode—making regular withdrawals.
The most cost-efficient portfolio would be an accumulating tax-deferred account filled with commission-free exchange traded funds. All rebalancing could be done with new cash or relatively small sales that would have no taxable results.
The least cost-efficient portfolio would be a taxable account filled with mutual fund shares that involved a commission to buy or sell and that required regular sales to support both distributions and rebalancing.
(I am assuming that the portfolio does not include individual stocks or bonds.)