FA Magazine March 2023 | Page 46

If you want to take a starting balance of $ 250,000 , you just divide the results by four , or divide by two if you ’ re starting with $ 500,000 . the third 3.92 % … and so on . When the client reaches 96 , the RMD withdrawal would be 8.4 %. The average required withdrawal over the first 25 years was 6.60 %. Only the stipulated distribution was withdrawn — no more and no less .
We analyzed this retirement withdrawal scenario over 26 rolling 25-year periods . The first period lasted from 1973 to 1997 . The second went from 1974 to 1998 . The last period was 1998 to 2022 . When we took all these quarter-century periods together , the average ending portfolio balance for this portfolio was $ 3,065,896 and the average annual RMD withdrawal was $ 201,917 . If you want to take a starting balance of $ 250,000 instead , you just divide the results by four , or divide by two if you ’ re starting with $ 500,000 . The total amount of money withdrawn over each 25-year period averaged just over $ 5 million ( again , taking 25 withdrawals over 26 rolling 25-year periods ).
It almost sounds like a fairy tale : that a 72-year-old retiree could start with $ 1 million , take out $ 5 million over 25 years , and finish with $ 3 million . Recall , this is a 100 % equity portfolio , and that may be atypical for most retirees . Also consider that to achieve these results the retiree has to both annually rebalance and stay in the portfolio . They can ’ t bail out during rocky periods . ( That is also atypical !)
The next asset allocation portfolio holds 80 % equities and 20 % fixed income , and is likely more representative of an actual retirement portfolio . As expected , the client ’ s performance metrics decline slightly during the accumulation years ( in pre-retirement ) and during the retirement years . The 50-year average annualized return is 9.83 %, but the positive annual returns now happen 84 %
TABLE 1
50-Year Portfolio Performance
From January 1 , 1973 through December 31 , 2022 .
ACCUMULATION STATISTICS ( Pre-Retirement Portfolio Results )
DECUMULATION STATISTICS ( Retirement Portfolio Results )
VARIOUS PORTFOLIOS ( Showing Allocation Percentages )
50-Year Lump Sum Return *
50-Year Standard Deviation Returns
% Time Positive Annual Returns
Avg Annual Withdrawal 25-Yr Period ( Base : RMD Age 72-97 )
Total Amount Withdrawn 25-Yr Periods ( Average )
Retirement Portfolio Average Ending Balance **
100 % Equity ( Hot Salsa )
40 % S & P 500 • 20 % Russell 2000 • 20 % MSCI EAFE 20 % DJ US REIT
10.48 16.68 80 % 201,917 5,047,924 3,065,896
80 % Equity / 20 % Fixed Income
35 % S & P 500 • 15 % Russell 2000 • 15 % MSCI EAFE 15 % DJ US REIT • 15 % Agg Bond • 5 % Cash
9.83 13.66 84 % 176,769 4,419,233 2,550,020
60 % Equity / 40 % Fixed Income
30 % S & P 500 • 10 % Russell 2000 • 10 % MSCI EAFE 10 % DJ US REIT • 25 % Agg Bond • 15 % Cash
8.96 10.68 84 % 150,184 3,754,599 2,017,904
40 % Equity / 60 % Fixed Income
20 % S & P 500 • 10 % Russell 2000 • 5 % MSCI EAFE 5 % DJ US REIT • 40 % Agg Bond • 20 % Cash
8.13 8.20 88 % 129,810 3,245,243 1,626,794
20 % Equity / 80 % Fixed Income
10 % S & P 500 • 5 % Russell 2000 • 2.5 % MSCI EAFE 2.5 % DJ US REIT • 60 % Agg Bond • 20 % Cash
7.22 6.35 92 % 112,971 2,824,269 1,316,921
100 % Fixed Income ( Mild Salsa )
70 % Agg Bond • 30 % Cash
6.01
5.45
92 %
93,655
2,341,373
979,092
* Assuming lump sum investment and annual rebalancing . Analysis completed using customized spreadsheet developed by the author . ** The retirement portfolio had a starting balance of $ 1,000,000 with annual end-of-year withdrawal based on RMD schedule starting at age 72 . Ending portfolio balance is the average over 26 rolling 25-year periods . First 25-year period was 1973-1997 , second period was 1974-1998 , and so on .
42 | FINANCIAL ADVISOR MAGAZINE | MARCH 2023 WWW . FA-MAG . COM