May 1st, 2018 | by

What’s a Sustainable Withdrawal Rate for a Retirement Portfolio?

  • When we analyze rolling 30-year periods back to 1926, we find that a 4% withdrawal rate runs a low risk of depleting a retiree’s portfolio.
  • Inflation has a significant impact on the sustainability of a retirement portfolio.
  • We prefer a total return over an income-oriented approach to generate cash flow from a retirement portfolio.

When saving and investing for retirement, perhaps the most important questions are two related ones: how large a nest egg is required and what’s a sustainable portfolio withdrawal rate during your golden years. The difficulty of such questions is brought into relief by some current market trends—inflation is creeping up; volatility has returned to equity markets, which have relatively low expected returns due to high valuations; interest rates are rising, and bond returns this year are negative (the Bloomberg Barclays Aggregate Bond Index declined 2.5% year-to-date to April 26). Adding longevity risk—people are living longer—to the mix makes the retirement portfolio equation even harder to solve.

With these elements in mind, we decided to conduct research on the perennial question of what’s a sustainable portfolio withdrawal rate. We analyzed all 63 30-year rolling period from 1926 to 2017, assumed a 50/50 portfolio (50% stocks, as measured by the S&P 500 Index, 40% US bonds*, 10% cash), and tested withdrawal rates ranging from 3% to 7%.

The Intersection of Withdrawal and Inflation
Here’s the methodology we used: we assume the investor retires with a $1 million portfolio and seeks to fund living expenses for 30 years (e.g., from age 65 to 95). He withdraws a percentage of the initial portfolio every year and adjusts the amount each year according to inflation. For example, with a 4% withdrawal and inflation-rate scenario, the retiree would withdraw $40,000 from the nest egg the first year, $41,600 the second year, $43,264 the third year, and so on. Exhibit 1 provides some indication of how much even a one percentage point increase in the cost of living can impact a portfolio at different rates of withdrawal.

*40% bond portfolio consists of 20% 5-Year Treasury Notes and 20% Long-Term Government Bond Index (Source: Morningstar)

When surveying all 30-year periods, we can see that starting years make a big difference—which underscores the importance of prudent, conservative planning. The 50/50 portfolio averaged an annualized return of 8% to 9% but varied from just 6% to nearly double that rate of return. Exhibit 2 compares three 30-year periods and assumes a 4% withdrawal rate and 3% inflation. As you can see, the portfolio is depleted for the period commencing in 1929, on the eve of the Great Depression, despite the modest assumptions for inflation and withdrawal rates, while retirees fortunate enough to start drawing from their nest egg in 1975 saw their portfolio values multiply in 30 years of retirement.


Let’s now consider how a wide range of withdrawal and inflation rates would have fared during all 30-year periods over the past 90 years. As demonstrated in Exhibit 3, a 3% withdrawal rate was sustainable in nearly every period, even with elevated inflation. A 4% withdrawal rate, often cited as a benchmark in financial planning, was successful except in cases where inflation creeps above 5%. Withdrawal rates of 5% or higher appear to be fundamentally risky, even when inflation is a fairly modest 4%.

Obviously, there is no magic number that is right for everyone; an appropriate withdrawal rate depends on numerous factors such as size of portfolio and an individual’s age, lifestyle, spending and health. I have related above some of the results from our extensive research. I invite you to review our full study (, in which we also take up the important question of how to invest the retirement portfolio and generate enough income to meet monthly withdrawals (hint: we much prefer a total return approach vs. a focus on interest and dividend income and particularly eschew reaching for yield in this low interest-rate environment).

Determining the appropriate withdrawal rate from a portfolio to cover living expenses in retirement is a crucial but challenging exercise. Our research points to 4% as being a reasonable starting point, though actual inflation rates and individual-specific issues could alter the equation.

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Gerstein Fisher
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