Fundamental Investing
for public use
MAKE A LONG-LASTING IMPRESSION
By choosing the right retirement income strategy
As you near retirement, you will need to determine how much money you should take out of your portfolio
each year. You also need to make sure you don’t spend down your retirement savings too fast and outlive
your assets. Work closely with your advisor to find a prudent withdrawal rate and a suitable asset allocation
for your portfolio.
Plan well, retire well
Whether you have decades, years or days before you retire, achieving your goals will likely
require a well-balanced portfolio coupled with a sustainable withdrawal strategy. According
to a well-known retirement study (see chart below and reverse side for details), making
the right choices today may significantly increase your chances of meeting your retirement
income and estate planning goals.
The odds of your nest egg lasting 30 years
It’s highly dependent on your portfolio allocations and annual withdrawal rate.
Chart source: Journal of Financial
Planning, September 2012. Data for
stock returns are monthly total returns
to the S&P 500 Index, and bond
returns are total monthly returns to
high-grade corporate bonds. Both sets
of returns data are from January 1926
through December 2009, as published
in the Ibbotson SBBI 2010 Classic
Yearbook from Morningstar. Inflation
adjustments were calculated using
annual values of the CPI-U, as published
by the US Bureau of Labor Statistics
at www.bls.gov.
WITHDRAWAL RATE
(AS A PERCENTAGE
OF INITIAL
PORTFOLIO VALUE)
100% US equities
8%
44%
35%
9%
0%
0%
7%
55%
45%
22%
7%
2%
6%
62%
60%
51%
22%
11%
5%
80%
82%
67%
31%
22%
4%
98%
100%
96%
80%
35%
75% US equities
25% bonds
50% US equities
50% bonds
25% US equities
75% bonds
100% bonds
PERCENT CHANCES OF THE PAYOUT LASTING FOR 30 YEARS
A well-diversified mix and lower withdrawal rate can increase your chances
of long‑term success.
Keep in mind that all investments carry a certain amount of risk, including the possible loss of the principal amount invested.
No investment strategy can guarantee a profit or protect against a loss.
Generally, stocks are more volatile than bonds. Government and corporate bonds have more moderate short-term price fluctuations
than stocks but provide lower potential long-term returns. Bonds contain interest rate risk (as interest rates rise, bond prices usually
fall), the risk of issuer default, and inflation risk.
See the reverse side for other important information.
ABOUT THE
RETIREMENT STUDY
Conducted by three professors from Trinity University
and first published in 1998 in
the Association of American
Individual Investors’ AAII
Journal, the “Trinity” retirement study uses decades of
stock and bond market returns
to help illustrate the importance and potential benefits
of a well-diversified portfolio
throughout retirement.
The latest Trinity study release
(September 2012) examines
the sustainability of a range of
withdrawal rates from retirement portfolios with varying
US and international stock/
bond asset allocations.
The study’s authors used the
S&P 500 Stock Index and
Salomon Brothers Long-Term
High-Grade Corporate Bond
Index to represent the US stock
and US corporate bond components, respectively, of each
portfolio.
In the study, five-year intervals
were chosen for each payout
period in retirement, ranging
from 15 to 30 years. A portfolio
was considered “successful” if
it ended a particular withdrawal
period with a positive value.
Historical market performance: Portfolio allocation success rates
IMPORTANT: The projections or other information
generated by the @Risk (2001) software used to
complete the Monte Carlo simulations regarding the
likelihood of various investment outcomes are hypothetical in nature, do not reflect actual investment
results and are not guarantees of future results.
planned withdrawals and complete a ­payout period
with positive values. All simulations include monthly
rebalancing to maintain the desired asset allocation.
In short, the study found that
• withdrawal periods longer than 15 years dramatically reduced the probability of success at withdrawal
rates exceeding 5%
Key assumptions and limitations @Risk software
relies upon Monte Carlo simulations to calculate
• bonds increased the success rate for the lowportfolio success rates. Monte Carlo simulations
to mid-withdrawal rates, but retirees could still
are analogous to repeatedly rolling many dice at
benefit with an allocation to stocks
the same time, and a random set of results are gener• retirees
who desire inflation-adjusted withdrawals
ated each time several dice are rolled, which means
should anticipate a substantially reduced withdrawal
results will vary for each simulation. For example, if
rate from the initial portfolio
you repeatedly roll several dice at the same time, the
probability of all sixes coming up in the same roll is
• stock-dominated portfolios using lower withdrawal
very low; however, other results are more probable,
rates may last longer, but at the expense of the
such as one six resulting in any given roll.
retiree’s current standard of living
This Monte Carlo simulation used to calculate portfolio success rates relies upon mathematical methods to
estimate the likelihood of a particular outcome based
on historical data coupled with a withdrawal from
month-end portfolio values net of monthly withdrawals, for a payout period of 360 months (30 years).
After the first month’s simulation, each subsequent
month’s S&P 500 returns, bond returns and inflation
rates (CPI-U) were randomly drawn based on historical distribution characteristics and correlations.
The completion of an entire payout period concluded the first simulated iteration and was repeated
999 times for a total of 1,000 iterations for each
withdrawal rate, asset allocation and ­payout period.
The total return to the portfolio was calculated for
the period and added to the arbitrary beginning balance of $1,000. That month’s ending value of the
portfolio, net of the withdrawal, was the beginning
value for the next period, unless a portfolio value was
zero, in which case the portfolio failed and was not
included in the calculation. In the second and subsequent years of the inflation-adjusted simulations,
an inflation rate was drawn to adjust to that year’s
monthly withdrawals. A portfolio success rate is the
percentage of the simulated portfolios that provide
• for payout periods of 15 years or less, a withdrawal
rate of 8% to 9% from a stock-dominated portfolio
appears sustainable­­
Please note that for the purposes of this flyer we
used the 2003 update and focused on the results
derived from retirement portfolios composed of
US equity and bond allocations. We also chose to
highlight the study’s 30-year results, as this may be
considered a typical payout period for many retirees
today. However, it is important to note that certain
shorter periods did perform better than the one
highlighted here.
No forecasts can be guaranteed.
Stock returns are represented by the S&P 500
Stock Index, which measures the broad US stock
market. Corporate bond returns are represented by
the Salomon Brothers Long-Term High-Grade
Corporate Bond Index, which includes nearly all
AAA and AA rated bonds with at least 10 years
to maturity. International stock returns are represented by the MSCI EAFE Index, which measures
the non‑US stock market. It is not possible to invest
directly in an index.
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