In the past, when we did retirement projections for clients nearing retirement, we created
detailed cash flows, taking into consideration their retirement benefits, Social Security
income and earnings from investments. We tried to use very conservative rates of
return and higher rates of inflation than we have historically experienced. Nevertheless,
it is still possible to run out of money if the markets take a dive early in retirement. In an
article published a few years ago by Wall Street Journal financial columnist Jonathan
Clements, titled “Playing the Right Retirement Cards”, Jonathon discussed how much
you can safely draw from your retirement portfolio each year without having your funds
depleted, using a technique called Monte Carlo simulation.
With Monte Carlo Simulation, thousands of cash flow scenarios are generated based
on the probabilities of the rates of returns for different portfolio mixes of stocks and
bonds. Then, the percentage of time that one’s funds will last until the end of retirement
is tabulated. T.Rowe Price, the Baltimore mutual fund company, put together some
tables to help you determine how much you can draw annually from their retirement
portfolio, based on different mixes of stocks and bonds. Below is a subset of one of
their tables. For example, if you have a 60 percent stock, 40 percent bond portfolio and
you want to withdraw 5% the first year of retirement and each year thereafter with an
adjustment for inflation, there is only a 58% chance your funds will hold out for 30 years.
30-Year Retirement
Stock/Bond Mix (%)
Withdrawal Rate 60/40 40/60
4% 86% 85%
5% 58% 42%
6% 28% 10%
7% 7% 1%
The lower the percentage draw and the higher the stock percentage allocation, the
higher the probability you can make it through retirement.
Thus, if you have a million dollars invested 60% in stocks and 40% in bonds, you will
only have a 58% chance of your money lasting for thirty years if you withdraw $50,000
the first year of retirement and then $50,000 adjusted for inflation each subsequent year.
As Mr. Clements explains in his article, to understand why your funds may not last, you
need only look at the thirty-year period ending in 1998. If you were invested in a
portfolio of 60% stocks, 30% bonds and 10% Treasury bills during that period, it would
have generated an average rate of return of 11.7%. Despite that, due to low rates of
return in the early years, the sustainable withdrawal rate would only have been 5.8%. If
you could have lived the period in reverse, the sustainable portfolio withdrawal rate
would have been 10.7% due to the high returns in the early years.
Many financial planners now incorporate Monte Carlo analysis into their retirement
planning. T. Rowe Price now provides a free Retirement Income Calculator you can use
to determine if your retirement savings is sufficient. You can visit their site at http://www3.
troweprice.com/ric/RIC/.
So, have you saved enough to stop working so much and start travelling? It may just
depend on how lucky you are in the early years of your retirement.
David C. Patterson, CFP® and Erin Patterson, CFP® are the owners of Patterson Advisors, LLC, a fee-
for-service-only financial advisory firm. Patterson Advisors, LLC is a Registered Investment Advisor,
registered with the State of Michigan, helping clients in Waterford, Clarkston and Royal Oak, Michigan
as well as other Oakland County, Michigan communities . Visit www.pattersonadvisorsllc.com for more
information or call 248-674-2108.
Published in the Oakland Insider, October, 2007
If You're Lucky Enough You May Be Able to Retire!
By David and Erin Patterson