Our last blog article focused on safe retirement withdrawal rates. We explained the well-known study by Bengen that predicted a 4.1% withdrawal rate from one’s portfolio (with annual adjustments for inflation) would last through a 30-year retirement in all types of markets.

At a recent Financial Planning Association of Michigan’s fall symposium, two different presentations addressed retirement portfolio withdrawal rates. Various studies, including Bengen’s study recommend withdrawal rates in the 4% to 5% range (with inflation adjustments).

Studies subsequent to Bengen’s study showed that with broader diversification the withdrawal rate can be increased by 0.5% or more. Other studies have shown that adjusting annual returns upward and downward as a result of various rules can increase the safe withdrawal rate to more than 5%.

A more recent study by John Harris, CFP®, titled “Market Cycles and Safe Withdrawal Rates” (Journal of Financial Planning, September, 2009), discussed the fact that “financial markets move in long-run cycles. These long-range patterns of the U.S. financial market – called secular cycles, significantly affect safe withdrawal rates.” If you are lucky enough to retire at the beginning of an up-market cycle, you’ll be able to withdraw a higher percentage of your portfolio annually. If you are unlucky and start retirement at the beginning of a downward market cycle, your safe withdrawal rate will be lower.

Unfortunately, it’s very difficult to know where you are in one of these cycles. Harris’ study found that safe withdrawal rates varied in a range of 2% to 4%, significantly lower than rates quoted in previous studies.

For planning purposes, it seems clear that you should not plan to withdraw more than 4% in any case. Other factors that can impact safe withdrawal rates are the portfolio stock/bond mix, life expectancy and expected spending decreases as you age. Regardless of what the future holds, the larger you can grow your investment portfolio, the better off you’ll be.