A New Tool to Visualize Retirement Planning
Bill Bengen’s research calculated how much a retiree can take out safely from a generic portfolio over 30 years without running out of money. Depending on the asset allocation, the safe withdrawal rate has variously been computed at 4% of the initial portfolio, with the dollar figure indexed for inflation thereafter, or 4.5% if the portfolio is more broadly diversified.
But wouldn’t it be nice if you could take a prospective client’s asset allocation and calculate the percent of time periods since 1926 that it would have survived a 30-year retirement?
You would be able to show a client who has a high percentage of fixed income that the odds are less than she might think. Better yet, you could vary the withdrawal rates, the length of the retirement, the asset allocation or the annual portfolio expenses, all right there on the screen, and see the odds of success change instantly as you change the key assumptions.
This is not a fantasy.
For the past couple of days, I’ve been playing with something called the Big Picture App, which features monthly historical data from 11 different asset classes since January 1926. While you’re playing with the variables, you can also define the rebalancing frequency and set a dollar figure on the legacy you want to leave to heirs.
Let’s say you create a balanced portfolio which is 15% allocated to 5-year Treasury bonds, 15% to 10-year Treasury bonds, 10% to global bonds, 20% to large-cap stocks,15% each to midcap and small-cap U.S. stocks and 10% to international (ex-USA) stocks. You set the withdrawal rate at 4%, inflation-adjusted, and the system calculates that since 1926, this portfolio would have sustained that withdrawal rate over 30 years 99% of the time. Raise the retirement period to 40 years and you still have a 92% success rate, historically.
Below is the Big Picture App’s base screen: Using historical performance information, with the assumptions listed at the bottom, how often would a balanced, aggressive and conservative portfolio meet the client’s spending goals?
This assumes an overall portfolio expense ratio of 0.5%. A separate table shows that if your expense ratio were actually 1.1%, the success rate of this portfolio goes down to 81%, and it declines dramatically as the cost of managing the portfolio goes up.
Below, the Big Picture App lets you explore the impact of fees by showing a range of outcomes, depending on the current portfolio’s total expenses, plus a variety of other expense structures.