William P . Bengen

Could a less constrained allocation unleash higher withdrawal rates for retirees ?

QUESTION THAT CONTINUALLY INTRIGUES ME IS WHAT we can do to get more out of our withdrawals in retirement . How can we “ push the envelope ” to get more in withdrawals and make them sustainable ?

In September 2016 , I wrote an article for Financial Advisor (“ Small-Cap Withdrawal Magic ”) exploring the dramatic increases retirees could theoretically make in their withdrawal rates if they used extreme asset allocations , particularly those concentrated in U . S . small-cap stocks . Recently I revisited this topic , with the aid of more asset classes ( seven instead of the original three ), and saw even more favorable results . In this article , I will report the results of this research , as well as adding something lacking in the original article : a concrete , immediately applicable recommendation for accessing at least a portion of these higher withdrawal rates , without any additional risk .

My current research calls for a “ worst-case ” 4.7 % inflation-adjusted maximum safe initial withdrawal rate ( what I call “ SAFEMAX ”) from a portfolio invested in seven asset classes : an 11 % allocation to U . S . large-cap stocks , an 11 % allocation to U . S . small-cap stocks , 11 % to U . S . micro-cap stocks , 11 % to U . S . midcap stocks , 11 % to international stocks , 40 % to U . S . intermediate-term government bonds , and 5 % to U . S . Treasury bills . I assume the portfolio will be tax-advantaged , that there ’ s a 30-year time horizon with a zero portfolio balance at the end , that the portfolio will be annually rebalanced , and that the retiree will make annual midyear withdrawals . The worst-case scenario applies to the unlucky individual who retired October 1 , 1968 .

The equal-weighted equity allocation seems to work well in my research on

MAY 2024 | FINANCIAL ADVISOR MAGAZINE | 15