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Introducing the Target Percentage™

It’s been almost 20 years since Bill Bengen’s article in the Journal of Financial Planning established the 4% Rule as the Gold Standard in retirement planning.  Today, financial advisors still regularly recommend a 4% withdrawal rate to their clients.  However, there are many misconceptions about the 4% Rule, such as “How much should you withdraw after the first year to sustain the portfolio?” and “How ‘safe’ is this withdrawal strategy?”

There have been many challenges to the 4% Rule.  The initial reaction to Bengen’s paper was that 4% is far too low because the high returns of the 1990s surely justified a much higher withdrawal rate.  Today, researchers question whether 4% is too high and say retirees need to monitor their portfolios going forward and should be prepared to reduce withdrawals if long-term portfolio survivability is threatened.  But what measure of portfolio health should be used?  And what action should be taken if this measure indicates danger?  With all the uncertainty surrounding withdrawal rates, what’s a retiree (and their financial advisor) to do?

In January 2013, David Zolt authored an article in the Journal of Financial Planning titled “Achieving a Higher Safe Withdrawal Rate With the Target Percentage Adjustment” to address these questions.  In this webinar, David reviews the research underpinning the 4% Rule, addresses the current research, and illustrates examples of how his new concept of the Target Percentage is used to monitor portfolio safety and the actions required to extend portfolio longevity.  The webinar is about an hour.

Is 6% a Safe Withdrawal Rate?

A 4% initial withdrawal with annual CPI increases thereafter has a 94% probability of success over 30 years.  If the retiree skips CPI increases in years in which their withdrawal rate exceeds the Target Percentage, the probability of success increases to 100% (99.8%).

If the retiree takes an initial withdrawal of 6% of their portfolio and agrees to skip CPI increases in years in which their withdrawal rate exceeds the Target Percentage, their probability of success over 30 years is 93%.

Success rates over 30 years are shown below.

IWR          TSWR          TPA
4.0%         94.3%        99.8%
5.0%         81.4%        98.5%
6.0%         61.0%        93.1%
7.0%         39.4%        80.9%

IWR = Initial Withdrawal Rate
TSWR = Traditional Safe Withdrawal Rate (full CPI increase each year)
TPA = Target Percentage Adjustment (skip CPI increase only in years in which the TP test is failed)

Do you think 93% confidence is safe?  If so, then a 6% initial withdrawal rate is safe as long as inflation increases are subject to passing the Target Percentage test each year.

The above statistics are from the research for my January, 2013 Journal of Financial Planning article, “Achieving a Higher Safe Withdrawal Rate With the Target Percentage Adjustment.”

Here is a graph of the data from the table above.  Click on it to enlarge it.

Prob of Success Over 30 Years

Keywords:  4% Rule, 4 Percent Rule, Safe Withdrawal Rate, Spending in Retirement, Dynamic Withdrawal Strategy, Adaptive Withdrawal Technique, Retirement Planning, Will I outlive my money?