It pays to be cautious when withdrawing from retirement savings – and we have 30 years of proof

Working away on a summer day can give rise to daydreams of beach-side vacations or visions of a relaxed retirement by the seaside.

When such thoughts strike, I open the data vault to examine market history in an effort to develop a sense of when it might be safe to turn off the computer, grab a towel and head to the lake.

I recently looked at William Bengen’s 4-per-cent retirement rule, which appears to be holding up reasonably well even for the unlucky group of investors who started their retirement at the very top of the internet bubble in the summer of 2000. The value of their portfolios soon plummeted, and they withdrew a higher percentage of their savings to generate steady real income.

Mr. Bengen considered U.S. data in his 1994 paper Determining Withdrawal Rates Using Historical Data. He figured that a retiree’s balanced portfolio of U.S. stocks and bonds would last for at least 30 years while paying a 4-per-cent initial annual withdrawal rate that was subsequently adjusted for inflation.

When translating the idea to the Canadian market, I started retirees with $1-million portfolios, which is a round figure that can be easily scaled to fit more specific situations. The portfolios have a 60/40 split between stocks and bonds, and more specifically put 40 per cent in the S&P Canada Aggregate Bond Index (Canadian bonds), 20 per cent in the S&P/TSX Composite Index (Canadian stocks), 20 per cent in the S&P 500 index (U.S. stocks), and 20 per cent in the MSCI EAFE Index (international stocks).

Retirees take spending money out of their portfolios at the end of each month – a 4-per-cent initial annual withdrawal rate equates to $3,333.33 per month – with the payments being adjusted each month to account for inflation. (The figures herein are based on inflation-adjusted monthly data with reinvested dividends and distributions. They do not include fund fees, taxes, or other trading costs. The portfolios are rebalanced monthly.)

I previously explored how retirees fared when they started at the top of the internet bubble at the end of August, 2000, and tested initial withdrawal rates ranging from 3 per cent to 6 per cent. It turns out, those opting for withdrawal rates of 5 per cent or more exhausted their portfolios before making it through 30 years worth of retirement. Gulp!

However, most people don’t retire at the top of one of the biggest market bubbles in recent history, which was followed a few years later by the similarly disastrous financial crisis of 2008-09. Today, I check on the performance of investors who retired at the end of each month over the 30 years starting from the end of May, 1994, through to the end of May, 2024.

The accompanying graph shows the value of the retiree portfolios at the end of May, 2024, depending on when they started. The different lines on the graph show the results of using different initial withdrawal rates (with the withdrawals subsequently adjusted for inflation) varying between 3 per cent and 6 per cent.

Notice that nearly all of the investors who opted for a 6-per-cent initial withdrawal rate and started their retirements between mid-1997 and mid-2001 have already gone bust. Their portfolios failed to last the full 30 years and they’ll likely be joined by others before too long.

Investors who opted for a 5-per-cent initial withdrawal rate have all survived – so far – with the exception of those who started at the end of August, 2000, which marked the top of the market bubble. Mind you, those who started just before, and after, the bubble’s peak are likely to run out of money soon.

I hasten to add that investors who started with hefty 6 per cent withdrawal rates just before the financial crisis of 2008-09 also appear to be in trouble because they still have over a decade to go. For instance, those who started in early 2007, have about $258,000 left in their accounts (adjusted for inflation), which amounts to a little more than four years worth of withdrawals.

Retirees who opt for 6 per cent withdrawal rates are probably asking too much of their $1-million portfolios. After all, they’re looking to extract $60,000 per year or $1.8-million over the course of 30 years in inflation-adjusted terms.

On the other hand, particularly lucky investors who retire into an unusually strong bull market – or those opting for much lower withdrawal rates – are likely to grow their portfolios in retirement.

While it’s hard to know how those who retire today will fare over the next 30 years, a little caution seems in order before taking the retirement plunge.

Norman Rothery, PhD, CFA, is the founder of StingyInvestor.com.

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