Sufficient Income and Sustainable Withdrawal Rates for Retirement

Abstract

Since the passage of the Employee Retirement Income Security Act of 1974 (ERISA), numerous companies from throughout the United States have chosen to change from providing “Defined Benefit” pension plans to providing “Defined Contribution” pension plans.  Successful retirement planning is an iterative process that requires the management of many variables. Some are random and unpredictable in scope and magnitude and others are choices we make as our retirement objectives change. It’s essential that changes be incorporated expeditiously to minimize adverse outcomes. One can begin the process by estimating the annual income required to support one’s “retirement lifestyle” if retirement occurred today. Then extrapolate that income to the planned retirement date based upon the expected rate of inflation. A “modified four percent rule” can then be used to estimate the portfolio value required to support 30 or more years in retirement. The financial planner and client should go through this process at least every two years or when major events suggest a change is required. To assist the planner, this paper extends the Four Percent Rule in the following ways: Time in retirement is 16 – 40 years in 2-year increments with an asset allocation range is 0% to 100% stocks in 15 equal steps.