Sustainable Withdrawal Rates for New Retirees in 2015
12040-Pfau-Sustainable-Withdrawal-Rates-Whitepaper-
12040-Pfau-Sustainable-Withdrawal-Rates-Whitepaper-
Create successful ePaper yourself
Turn your PDF publications into a flip-book with our unique Google optimized e-Paper software.
SIMULATING SUSTAINABLE<br />
SPENDING RATES IN <strong>2015</strong><br />
We now put all of this together to develop Monte Carlo simulations<br />
estimat<strong>in</strong>g susta<strong>in</strong>able spend<strong>in</strong>g rates <strong>for</strong> retirees at the start of <strong>2015</strong>.<br />
Details about the underly<strong>in</strong>g assumptions <strong>for</strong> these simulations are<br />
provided <strong>in</strong> the appendix. These <strong>in</strong>itial spend<strong>in</strong>g rates are specifically<br />
calibrated to <strong>in</strong>clude a 3% annual cost-of-liv<strong>in</strong>g adjustment (COLA),<br />
rather than hav<strong>in</strong>g spend<strong>in</strong>g adjust precisely with the realized <strong>in</strong>flation<br />
experienced over retirement. Table 3 provides the results <strong>for</strong> these<br />
simulations.<br />
We observe that susta<strong>in</strong>able spend<strong>in</strong>g rates are noticeably lower than<br />
4% when we <strong>in</strong>clude fees and account <strong>for</strong> today’s low bond yields and<br />
high stock market valuations. As well, extend<strong>in</strong>g the retirement horizon<br />
from 30 to 40 years does also make a significant difference <strong>for</strong> the<br />
results. A 10% failure rate (or, conversely, a 90% success rate) is usually<br />
considered as a decent acceptable basel<strong>in</strong>e <strong>for</strong> Monte Carlo analyses<br />
of susta<strong>in</strong>able spend<strong>in</strong>g rates, and over a 30-year horizon the highest<br />
susta<strong>in</strong>able spend<strong>in</strong>g rate is 2.12%. That is with a 20% stock allocation.<br />
Over a 40-year horizon, the highest rate is susta<strong>in</strong>ed with 40% stocks,<br />
though this spend<strong>in</strong>g rate has fallen to 1.55%.<br />
// TABLE 3: SUSTAINABLE SPENDING RATES<br />
TABLE 3: SUSTAINABLE SPENDING RATES<br />
For Retirements Beg<strong>in</strong>n<strong>in</strong>g on on January January 1, <strong>2015</strong> 1, <strong>2015</strong><br />
Stock Allocation<br />
Stock Allocation<br />
0% 20% 40% 60% 80% 100%<br />
30-YEAR RETIREMENT HORIZON<br />
0% 20% 40% 60% 80% 100%<br />
40-YEAR RETIREMENT HORIZON<br />
5%<br />
1.87%<br />
2.00%<br />
1.89%<br />
1.70%<br />
1.45%<br />
1.19%<br />
5%<br />
1.21%<br />
1.38%<br />
1.37%<br />
1.26%<br />
1.10%<br />
0.90%<br />
10%<br />
1.95%<br />
2.12%<br />
2.10%<br />
1.97%<br />
1.77%<br />
1.53%<br />
10%<br />
1.28%<br />
1.49%<br />
1.55%<br />
1.49%<br />
1.36%<br />
1.19%<br />
Failure Rate<br />
20%<br />
2.07%<br />
2.30%<br />
2.36%<br />
2.33%<br />
2.21%<br />
2.04%<br />
Failure Rate<br />
20%<br />
1.39%<br />
1.65%<br />
1.78%<br />
1.80%<br />
1.74%<br />
1.62%<br />
30%<br />
2.17%<br />
2.42%<br />
2.56%<br />
2.59%<br />
2.56%<br />
2.45%<br />
30%<br />
1.48%<br />
1.77%<br />
1.96%<br />
2.05%<br />
2.06%<br />
1.99%<br />
50%<br />
2.34%<br />
2.66%<br />
2.92%<br />
3.11%<br />
3.23%<br />
3.28%<br />
50%<br />
1.66%<br />
1.99%<br />
2.29%<br />
2.53%<br />
2.68%<br />
2.74%<br />
NOTE: See appendix <strong>for</strong> explanation about the methodology <strong>for</strong> these calculations.<br />
FOR FINANCIAL PROFESSIONAL USE ONLY - NOT FOR USE WITH THE GENERAL PUBLIC<br />
10
Change language