Skip to main content

Sound Advice: September 15, 2021

What’s a Safe Withdrawal Rate in Retirement?

If you are already retired or planning to retire soon, one of your biggest concerns will be having sufficient income from your investments (and Social Security) to cover your ongoing expenses without running out of money.  Another concern will be how you will spend your time, preferably in a satisfying manner. 

The financial part of the equation can be tricky since there are several variables that can change the outcome dramatically.  Those with children often are concerned about leaving a substantial inheritance.  Those without heirs can draw down the earnings on their assets and take distributions from the principal amount.

The former situation has a heightened emphasis on the prospective returns on assets invested and the ongoing flow of expenses.  The usually suggested withdrawal rate is 4% of assets in Year One, adjusted each year thereafter for inflation.  When inflation rises, the withdrawal increases . . . and vice-versa.

Viewed against nearly a century of returns on both stocks and bonds, a 4% target would appear to be easily attainable.  For the past 95 years, the average annual return on stocks has been about 10%.  Returns on bonds have been closer to 5%.  Given this information, one would think that a 4% target would be easy to reach.  It may or may not be.

A closer look at more recent returns on stocks will be helpful.  From 2000 to 2010, following the collapse of the stock market after the bubble, the market averages fluctuated widely, but ended the period with essentially no net return.  In the decade that followed, however, returns were well above the long-term average.

Bonds followed a dramatically different path.  Over the past four decades, interest rates on bonds went from the mid-teens to a notch above zero.  When interest rates drop, bonds rise.  Not surprisingly, 40 years of dropping interest rates led to unusually high returns on bonds.  Now interest rates are rising and bond prices are falling.

Where are we now?  Stock valuations are currently toward the upper end of their historic range, running above 20 times prospective earnings for 2022.  Although corporate profits have rebounded impressively from their Covid-depressed levels of 2020, much of the government stimulus aimed at economic recovery has passed.  And a hefty portion of the above average savings accumulated during the pandemic has been spent. 

With that said, it would be naïve to look for better than moderate returns from stocks going forward.  Plus, with interest rates on the rise over the next few years, bond prices will remain under pressure.

The response to this prospect points toward a higher percentage in stocks along with the acceptance of inherently greater volatility.  Bond allocations would be reduced; their primary role would be to provide overall stability, rather than enhancement of returns.

N. Russell Wayne, CFP®

Any questions?  Please contact me at


Popular posts from this blog

Sound Advice: April 7, 2021

The High Dividend Strategy: Pros and Cons Let's start with the bottom line about investing in high dividend stocks: It works, but there are significant wrinkles.  A while back, I did a 20-year study of investing in high dividend stocks.  The approach was straightforward.  I began with the S&P 500 universe and divided it into 10 groups of 50 stocks each.  The groups were arranged by dividend yield, highest to lowest, at the beginning of each of the years.   I then tracked the total returns (dividends plus capital appreciation) of these groups for the full period. The results were illuminating.   The highest total returns were from the group with the highest dividend yields.   The returns then descended in perfect order down to the group with the lowest dividend yields.   What's more, the aggregate return from the group with the highest returns was greater than that of the Standard & Poor's 500 and its volatility over the period was lower. That did not mean all

Sound Advice: April 14, 2021

Up, Down & Sideways   In past years, the warmer months brought with them a time to turn one’s thoughts to more blissful endeavors.   Although childhood may have been many years ago, what lingers is the apparent freedom from care we felt when at last we were done with school.   Much has changed since those halcyon days when time hardly seemed to move.   Back then, the days went by slowly and the important decisions were few.   Now it’s almost as if you don’t know which direction to turn first. It’s all about communications and the seeming necessity of keeping up to date with what’s going on.   Much of the rising flow of developments may have little impact, but even so it’s no longer a time when we can disconnect until September. From an investment perspective, the challenge is to sort through the rapidly growing mountain of information to isolate the data that is critical and take action where it is needed.   On a grand scale, it’s a matter of separating the wheat from the cha

Sound Advice: April 21, 2021

How is the Market Doing? Despite all the noise being trumpeted by the media, the daily prattle about market moves is often wide of the mark and overloaded with information that is misleading or just plain inaccurate.   How else to explain a jump of several hundred points one day followed by a plunge the next day?   That makes no sense. Over time, the foundation for stock valuations is underlying profitability of the companies involved.   As profits increase, stock prices rise, though not necessarily in perfect reflection.   The relationship tends to be meaningful over extended periods, but often not in shorter spans of time.   That’s all about changes in investor psychology.   So let’s begin by defining the “market”.   If we are referring to stocks, the most common reference is to the Dow Jones Industrial Average, which consists of 30 major companies whose progress might be considered representative of the U.S. economy as a whole. The majority of the companies included here are r