Will You Run Out of Money During Retirement?

Will You Run Out of Money During Retirement?

May 05, 2014

Imagine: You are 84, living on $2,500 per month in Social Security plus $5,000 per month withdrawn from your investments. One of your checks bounces. You find out it’s because your investments are exhausted. There is nothing left. No more $5,000 per month from investments, ever again.

Suddenly, your income drops from $7,500 to $2,500 per month. But your expenses remain the same. What will you do?

Running out of money during retirement is a legitimate concern. But running out of money isn't a very exact term.

The reality is that most Americans will never run out of income; they will always have Social Security and they may have a pension or a guaranteed payment from an annuity. What retirees need to worry about is depleting the investments that produce investment income for living expenses.

Retirees are more likely to exhaust their investments if

They live a long time.

  • Inflation increases.
  • Investment returns or balances are lower than needed.
  • They need long-term care and don’t own long-term care insurance.
  • They provide financial support to needy family members or friends.

Many studies have examined the question of how long investments might last once withdrawals begin. Most results indicate that initial withdrawal rates greater than 3 to 5% of total investment balances are dangerous for retirees who want their withdrawals to last 30 years with annual adjustments for inflation.

The term initial withdrawal rate needs explaining. It is usually defined as the initial dollar amount of withdrawals divided by the total value of investments. A $50,000 per year withdrawal from one million in investments is an initial withdrawal rate of 5%. Most studies assume that the dollar amount of the first-year withdrawal increases each year at the rate of inflation.

The studies try to answer this question: If the initial withdrawal rate is X% of total investments and increases each year at the rate of inflation, will the investment portfolio last 30 years? Or 25? Or 20?

William Bengen, CFP® wrote a book about this, “Conserving Client Portfolios During Retirement,” in 2006. Bengen analyzed what would have happened to investors retiring on January 1 of every year between 1926 and 1975 – essentially 49 different retirements. He used

  • Annual rebalancing for constant investment ratios of 63% in large-company stocks and 37% in government bonds
  • Withdrawals that increased each year by inflation, and
  • Historic rates for inflation and returns on investments.

Bengen was trying to find what he called the “Maximum Safe Withdrawal Rate,” the maximum percentage that could be withdrawn the first year and then increased each year by inflation, without exhausting investments before the end of a 30-year retirement.

According to Bengen’s analysis,

  • For tax-deferred portfolios
  • With initial withdrawal rates of 4.15% or less, all retirement portfolios lasted 30 years or more.
  • With higher initial withdrawal rates, an increasing number of the retirement portfolios failed to last 30 years.
  • For example, with an initial withdrawal rate of 6%, 24 of the 50 retirement portfolios failed to last 30 years.
  • For taxable portfolios, the initial withdrawal rates had to be lower to achieve the same level of success.
  • Introducing other asset classes (small-company stocks, intermediate term bonds, etc.) increases the Maximum Safe Withdrawal Rate. However, the initial withdrawal rate still needed to be less than 4.6%.

Bengen also found that reducing the 63% invested in stocks reduced the Maximum Safe Withdrawal Rate.

Other studies questioned whether a greater-than-50% allocation to stocks during retirement was more likely to maximize investment withdrawals during retirement. Some studies suggest that is true; others suggest that it is not critical. No study seems to suggest that stock allocations in the 50% to 80% range are bad.

If this research is correct, the conventional wisdom that stock allocations should be sharply reduced during retirement may be wrong and dangerous.
Of course, these studies are based on historical data and past performance is no guarantee of future performance. Future investment returns may be very different from historical returns, even though the studies looked at very long periods of history.

Also, there are many other variables. For instance, one might have a more diversified mix of investments than S&P 500 Index stocks and government or corporate bonds.

The website bogleheads.com offers an excellent series of articles on this topic. You can find them here and here.


This is for educational purposes only. To learn more about the topics mentioned and if they are suitable for you, consult an appropriate professional. Tax laws can change at any time.

Any information provided in this presentation has been prepared from sources believed to be reliable, but is not guaranteed and is not a complete summary or statement of all available data necessary for making an investment decision. Any information provided is for information purposes only and does not constitute a recommendation.

Keep in mind that:

  • Past performance is no guarantee of future performance;
  • Investments involve the risk of loss of principal and earnings;
  • ETFs, mutual funds, including money market funds, etc. are not guaranteed in any way by the US Government, the FDIC, a bank or anyone else.
  • “Average annual return” evens out variations in the actual year-to-year returns.
  • ETFs, mutual funds and individual stocks and bonds fluctuate in value and there will always be times when they lose value.
  • None of the information provided by Arthur Stein is necessarily relevant to anyone’s particular situation. Situations differ among individuals and you should not assume that these generalizations or information apply to you.
  • Investments mentioned may not be suitable for all investors.

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