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 Index and Salomon
Brothers Long-Term HighGrade 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.
percentage of the simulated portfolios that provide
planned withdrawals and complete a ­payout period
with positive values. All simulations include monthly
rebalancing to maintain the desired asset allocation.
lio 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.
• for payout periods of 15 years or less, a withdrawal
rate of 8% to 9% from a stock-dominated portfolio
appears sustainable­­
In short, the study found that
• withdrawal periods longer than 15 years dramatiKey assumptions and limitations @Risk software
cally reduced the probability of success at withdrawal
relies upon Monte Carlo simulations to calculate
rates exceeding 5%
portfolio success rates. Monte Carlo simulations
• bonds increased the success rate for the loware analogous to repeatedly rolling many dice at
to mid-withdrawal rates, but retirees could still
the same time, and a random set of results are generbenefit with an allocation to stocks
ated each time several dice are rolled, which means
• retirees who desire inflation-adjusted withdrawals
results will vary for each simulation. For example, if
should anticipate a substantially reduced withdrawal
you repeatedly roll several dice at the same time, the
rate from the initial portfolio
probability of all sixes coming up in the same roll is
very low; however, other results are more probable,
• stock-dominated portfolios using lower withdrawal
such as one six resulting in any given roll.
rates may last longer, but at the expense of the
retiree’s current standard of living
This Monte Carlo simulation used to calculate portfo-
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
The completion of an entire payout period concluded important to note that certain shorter periods did
the first simulated iteration and was repeated
perform better than the one highlighted here.
999 times for a total of 1,000 iterations for each
No forecasts can be guaranteed.
withdrawal rate, asset allocation and ­payout period.
Stock returns are represented by the S&P 500
The total return to the portfolio was calculated for
the period and added to the arbitrary beginning bal- Stock Index, which measures the broad US stock
market. Corporate bond returns are represented by
ance of $1,000. That month’s ending value of the
the Salomon Brothers Long-Term High-Grade
portfolio, net of the withdrawal, was the beginning
value for the next period, unless a portfolio value was Corporate Bond Index, which includes nearly all
AAA- and AA-rated bonds with at least 10 years
zero, in which case the portfolio failed and was not
included in the calculation. In the second and subse- to maturity. It is not possible to invest directly in
an index.
quent 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
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