Flexibility and Retirement Planning

This is a guest post by Mike Piper.

Imagine this scenario: An investor (we’ll call her Susan) retires with a $700,000 portfolio. She plans to withdraw $28,000 in the first year of retirement and adjust that amount upward each year in keeping with inflation. In other words, Susan is using a 4% withdrawal rate–typically considered to be sustainable over a 30-year retirement.

Susan’s not looking to get rich, so she uses a moderate asset allocation for a new retiree: 40% stocks, 60% bonds.

In short, Susan is doing everything right — playing it "by the book" in every way.

Unfortunately, in the first year of Susan’s retirement, the stock market tanks, and her total portfolio declines by 16%. Obviously not a good year, but also not exactly a catastrophe.

Or is it?

The 16% decrease from the market coupled with the 4% withdrawal leaves Susan’s portfolio at just 80% of what it was at the beginning of the year. What was originally a 4% withdrawal rate with a 30-year time horizon (generally thought to be sustainable) is now a 5% withdrawal rate with a 29-year time horizon (very likely not sustainable).

Sequence of Returns Risk

The most obvious lesson here is one about "sequence of returns risk." Even a modest portfolio decline early in retirement is bad news! And, unfortunately, asset allocation — the most commonly-used tool for controlling risk in a portfolio — isn’t particularly effective at alleviating sequence of returns risk.

Paying Attention

But there’s also a lesson to be learned about the necessity of paying attention. There are a few things Susan can do to get back on track:

  1. Cut back on spending,
  2. Purchase a single premium immediate annuity with a portion of her portfolio, or
  3. Find a way to increase her income.

But if Susan doesn’t notice the significance of that 16% portfolio decline, she won’t make an appropriate course correction. And if she doesn’t do that, she’s very likely to run out of money during her lifetime.

Planning Must Be Flexible

I’m a big fan of John Bogle’s famous admonition to "stay the course" when investing. But it’s worth noting that a strict "rebalance and continue as planned" approach probably would not work in Susan’s situation.

While the wholesale abandonment of a well-constructed investment plan is generally unwise, rigidly sticking to a plan and refusing to make adjustments isn’t a great route either.

About the Author: Mike is the author of Investing Made Simple. He also blogs at The Oblivious Investor where he covers topics such as the best index funds for building a low-cost portfolio.

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  1. simplesimon says

    “And if she doesn’t do that, she’s very likely to run out of money during her lifetime.”

    Do you have numbers to back this statement up?

  2. Chuck says

    simplesimon: The numbers are in the Trinity study, which is responsible for the “4% withdrawal rate–typically considered to be sustainable over a 30-year retirement” at the beginning of the article.

  3. Mike Piper says

    simplesimon: Chuck is correct. The Trinity Study available here speaks to the topic somewhat. It indicates that a 4% withdrawal rate with a 50/50 stock/bond allocation would have a historical 95% chance of success, whereas a 5% withdrawal rate would have only a 76% chance of success.

    Unfortunately, the Trinty Study’s data only goes through 1995, and it only considers 5 possible allocations.

    A more thorough and up-to-date (though not free) analysis is available in Jim Otar’s Unveiling the Retirement Myth in which he looks at historical failure rates for a broader array of portfolios at various withdrawal rates.

  4. simplesimon says

    I figured the Trinity study would be cited here and I understand that’s where a 4% withdrawal rate for 30 years comes from. Couple things…

    1) The 4% is based on the initial value of the portfolio. Sure, it becomes 5% if your portfolio takes a hit, but the data doesn’t say 76% chance of success for a 5% withdrawal for 29 years. There have been some heavy discussion about this on the BH forums if I recall correctly.

    2) This is just semantics, but I still think 76% chance is pretty good survival and not “very likely” to run out of money.

  5. walkinwood says

    >I’m a big fan of John Bogle’s famous admonition to “stay the course” when >investing. But it’s worth noting that a strict “rebalance and continue as planned” >approach probably would not work in Susan’s situation.
    I feel you’re mixing two topics in the sentence above & that can be confusing. Susan should stay the course in her investment decisions. But she needs to be flexible in her spending decisions. Two very different things.

  6. Mike Piper says


    As to your point #1, I’d argue that the 76% chance of survival for a 30-year time horizon is still a meaningful (though admittedly imperfect) indicator. Even if the investor only has 29 “expected” years remaining, it’s quite possible she’ll end up living 30 or more.

    As to your point #2, in my view, a 24% chance of failure is nowhere near acceptable. That said, I concede that my phrasing as “very likely” was probably not the best choice of words.


    I agree that changing her spending would be one solution, but I’m not sure I’d agree that Susan should necessarily stay the course in her investment decisions. It may very well be a good idea to look into annuitizing (a portion of) her portfolio, even though that would have appeared unnecessary a year earlier.

    And to the extent that a person’s withdrawal rate (which is determined by her spending rate) is a factor in how she manages her portfolio, I’d say they’re not entirely separate topics.

  7. Edwin says

    I don’t see how you can say that her portfolio would drop 16% if the stock market drops 16%. Stocks only make up 40% while the rest is in fixed rate bonds. This would translate to 6.4% drop in her portfolio. That’s why it is recommended people allocate into less risky investments. While the upside is lower, so is the downside.

  8. Mike Piper says

    I didn’t say that it was a 16% market decline, just a 16% portfolio decline resulting from a market drop. And you’re right, that would take a market decline of more than 16%.

  9. Mike Piper says

    (edit of my prior comment)

    …unless the bond/cash portion of her portfolio also declined by 16%, which is unlikely (though not entirely impossible).

  10. simplesimon says

    I thought the whole premise of the Trinity study was to look at 30-year periods. Of course nobody knows how long they’re going to live and I doubt that anybody sticks to a 4% inflation-adjusted withdrawal rate for that long until death or money depletion, whichever comes first…but the Trinity study does (I think, correct me if I’m wrong).

    The 4% withdrawal rate and the subsequent 95% success rate with a 50/50 portfolio is supposed to encompass which scenarios, exactly? I’m at work so I can’t thoroughly read through the study at the moment, but wouldn’t it include such a decline of 16% (32% market declines have happened in the past)? It’s possible that this decline is bad enough to where the portfolio doesn’t survive for 30 years and therefore fall into the 5% of scenarios that failed.

    The Trinity study shows that a 50/50 portfolio has a 95% chance to survive for 30 years at a 4% withdrawal rate. After this hypothetical year 1 and the 16% portfolio decline, it’s still the same probability to survive 29 years, isn’t it? After the decline, it’s a 76% chance to survive for 30 years at a 5% withdrawal rate, but it would’ve still been a 76% chance to survive for 30 years at a 5% withdrawal rate a year earlier before the decline, right?

    Am I missing something?

    (This type of analysis really piques my interest, I don’t mean to be offensively aggressive.)

  11. Mike Piper says

    I’m enjoying the discussion. That’s why I write about this stuff. 🙂

    “The 4% withdrawal rate and the subsequent 95% success rate with a 50/50 portfolio is supposed to encompass which scenarios, exactly?…wouldn’t it include such a decline of 16% (32% market declines have happened in the past)?”

    Yep. It sure would.

    The case I’m trying (perhaps unsuccessfully) to make is simply that, by paying attention, it may be possible to learn that you may be heading down the road that puts you in that 5%–not necessarily because you did anything wrong, but simply because you had poor luck with sequence of returns.

    And if you notice early enough, it may be possible to make some (relatively minor) adjustments that could prevent you from falling into the unlucky 5% (or whatever the actual percentage may happen to be).

    And I imagine you’re absolutely right, very few people stick with a rigid x% inflation-adjusted withdrawal rate for their entire retired lives. And that’s basically all I’m getting at–a slight adjustment early (because you were paying attention enough to notice that things weren’t going as planned) may be a lot less painful than a severe adjustment several years down the line.

  12. Guy G. says


    Great post. About how she can get back on track, it is so true that tips on budgeting and hedging in areas of extra spending would really help. It’s amazing how quickly you can get back on track by reducing your spending by even $50 a month.

    Thanks for the clear and easy to read post.



  13. KD says

    this article is misleading. 16% decline – but what are declines in stocks vs in bonds? she is probably withdrawing /liquidating bonds or more likely she has 10% of portfolio in cash. in this scenario she probably wont even touch the part that has declined the most …i.e. stocks ..there by giving it a chance to recover fully over the 30 yrs. i don’t think she needs to change here withdrawal rate.

  14. Daddy Paul says

    An easy solution to the problem is to withdraw from fixed income when the market is low and equities when the market is reaching new highs.

  15. barry says

    Agree with Daddy Paul and will expand on that. Keep 5 years of expected withdrawals in a guaranteed interest/money market fund in an IRA – not in a 401K fund! Why? because you cannot selectively withdraw from a specific fund in a 401K, rather withdrawals are averaged from total investments, including your stock/bond funds. If the market is low when you need to withdraw your annual withdrawal, take if from the guaranteed interest funds. If, in a year, when you need to make a withdrawal, the market has had a good year – take it from your stock/bond funds. That will get you through the first 5-7 critical first years of retirement, and you reduce greatly the chance of surviving the worst case scenario (to a financial planner that is – that you live to 90 !

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