been applied using nine different initial withdrawals and nine different frequencies of increasing withdrawals during 1957–1981.
This period represents the worst twenty-five years for stocks since
1940; during this time the yield on long-term government bonds
increased from 3. 3 percent to 15 percent. The purple boxes show
how many years your principal lasted before running out. The other
boxes show what percentage of your investment remained after
twenty-five years. Green boxes indicate that you finished with more
than the original investment, gray boxes indicate that you were left
with 25–99 percent of your investment, and orange boxes indicate
that you had less than 25 percent remaining after twenty-five years.
For example, if you withdrew 6 percent initially and increased your
withdrawal in only one out of every five years, you finished the
twenty-fifth year with 28 percent of your original investment.
The financial industry has settled on one solution (the 4-percent
rule), but figure 9 offers nine approaches and table 9 provides
eighty-one different strategies for retirement income (the ones that
ran out of money are options for someone with a shorter time hori-
zon). The number of ways to create a personalized retirement-
income plan is limited only by your imagination. For example,
table 9 assumes a 50/50 portfolio and 1.5-percent annual fee, and
we know that small adjustments can change the outcomes. If you
reduced the fee to 1. 25 percent annually and took withdrawals
from an outside source such as a line of credit in years the portfo-
lio had a negative return (assume a 4-percent cost of funds), the
ending value for the 6-percent initial withdrawal with an increase
every five years would increase from 28 percent to 47 percent.
So in the worst twenty-five years for stocks in seventy-five years,
you could have taken out 7. 25 percent (6-percent withdrawal plus
1.25-percent fee) initially, increased the withdrawal every fifth year,
and finished with almost half of your investment.
Health care is the standard-of-living wildcard for a segment of
retirees. Figure 11 shows healthcare spending by age and quartile.
This includes out-of-pocket (uninsured) health-insurance costs,
including Medicare supplemental insurance; out-of-pocket costs
for prescription and nonprescription drugs; out-of-pocket costs for
hospital care, doctor services, lab tests, vision, dental, and nursing-home care; and out-of-pocket costs for medical supplies.
Each bar represents spending by an age group and each cluster of
bars represents different percentiles of healthcare spending. The
key is that the 90th and 95th percentiles increase significantly at
age 90+ (green bars), but spending is relatively stable across lower
percentiles of healthcare spending. Thus, although health care is
the area most likely to see increases in spending, dramatic
increases appear to be confined to a segment of retirees.
Nevertheless, this is a risk that retirees should insure against.
The Third Goal: Minimize Unexpected Reductions in Cash Flow
The third goal of retirees is to minimize the potential for unexpected reductions in cash flow. Because people’s comfort levels are
likely to be bounded by the worst that has happened, this goal
should be satisfied for many by designing an income stream that
Table 9: Ending Values (Percentage of Savings) Based on Initial Withdrawal and Frequency of Increase, 1957–1981
Frequency (in Years) of Cash-Flow Increase
Every Year 4 of 5 3 of 4 2 of 3 1 of 2 1 of 3 1 of 4 1 of 5 None
3.0% 139% 149% 152% 157% 166% 174% 178% 180% 190%
3.5% 106% 118% 122% 128% 139% 148% 152% 155% 167%
4.0% 74% 88% 92% 98% 111% 121% 126% 129% 143%
4.5% 42% 57% 62% 69% 83% 95% 101% 104% 119%
5.0% 10% 27% 32% 40% 56% 69% 75% 78% 96%
25 2% 11% 28% 42% 49% 53% 72%
23 24 23 16% 23% 28% 48%
23 24 25 2% 25%
Assumes 50/50 allocation and 1.5-percent annual fee, 1957–1981
n More than initial investment n 25–99 percent of initial investment n Less than 25 percent of initial investment n Number of years principal lasted before running out
Figure 11: Healthcare Spending
Source: Employee Benefit Research Institute
Distribution of Healthcare Expenditures 2003–2011,
for Different Age Groups (in 2013 $s)
25th Pct Median 75th Pct 90th Pct 95th Pct
Annual Healthcare Spending by Percentile and Age
Age 50–64 Age 65–79 Age 80–89 Age 90+