Estimating the Success of a Withdrawal Strategy
This calculator can be used to estimate the ability of a portfolio to last longer than a payout period – both with and without inflation – at a given withdrawal rate. The calculator needs only two inputs, including:
- The investment’s portfolio, which can include a mix of common stocks and bonds
- The desired payout period, which allows the user to select from 15, 20, 25, and 30 year timeframes
The calculator then provides the user with six set of outputs, including:
- The success rates at 3%, 4%, 5%, 6%, 7%, and 8% withdrawal rates
- The success rates are broken into two categories – with inflation and without inflation
What is a Success Rate?
The success rates appearing in this calculator are based on a 2011 landmark research study conducted by Philip L. Cooley, Ph.D.; Carl M. Hubbard, Ph.D.; and Daniel T. Walz, Ph.D. – Portfolio Success Rates: Where to Draw the Line. The estimates published by this study were based on data derived from 84 years of historical returns from 1926 through 2009. The timeframes analyzed in that study included 15, 20, 25, and 30 years. As part of this study, success rate was defined as the ability of a portfolio of stocks and / or bonds to last longer than a given payout period at a given withdrawal rate. The withdrawal rates appearing in the study include 3%, 4%, 5%, 6%, 7%, and 8%.
Success rates typically apply to withdrawals from a retirement portfolio. A success rate of 100% indicates there is a 100% chance the retirement portfolio will last longer than the payout period. The data used in this study includes large company common stocks, investment grade corporate bonds and inflation rates derived from the Consumer Price Index. While the possible mix of common stock and bonds held in a portfolio is without limit, the study simplified this view using the following five mixes, which are sufficient for investors to understand how their portfolios might perform:
- 100% Stocks
- 75% Stocks, 25% Bonds
- 50% Stocks, 50% Bonds
- 25% Stocks, 75% Bonds
- 100% Bonds
If we compare the results of this study, and use the 100% Stocks and 100% Bonds portfolios as our analytical bookends, we can draw the following conclusions:
- Ignoring inflation, a portfolio of 25% Stock and 75% Bonds is the only combination that provided a 100% success rate at all withdrawal rates with a 15-year payout period
- Ignoring inflation, portfolios consisting of either 100% Stocks or 75% Stocks and 25% Bonds provides the highest success rates at all withdrawal rates with a 30-year payout period
- If we account for inflation, all success rates are lower, and the same rules of thumb mentioned above apply
Interpreting the Results of Our Calculator
This calculator uses statistically derived information to provide an estimate of success rates. Statistically, a 100% success rate for a given combination of portfolio mix, withdrawal timeframe and withdrawal rate tell us there is a good chance of the portfolio surviving the withdrawal timeframe. But what happens with the success rate is not 100%? A success rate of 50% tells us there is an equal chance of the portfolio surviving the withdrawal timeframe or not surviving the withdrawal timeframe. Success rates of 75% or higher may carry an acceptable risk of failure.
One final note should be highlighted about this data. A rule of thumb often applied to retirement portfolio withdrawal rates is as follows:
A 4% withdrawal rate ensures the portfolio will survive its withdrawal timeframe and the investor can increase their withdrawals over time with inflation.
That rule of thumb aligns well with the findings of this study – Regardless of the withdrawal timeframe, at a 4% withdrawal rate, all portfolios have at least an 80% chance of surviving EXCEPT the 100% Bonds portfolio at terms greater than 25 years.