Some people who are about to retire make a big mistake: They keep too much of their retirement portfolio in “safe” fixed-income investments, and not enough in “risky” stocks. Some also make another mistake in retirement: They take too much money out in certain years, making it hard for the portfolio to recover from bear markets.
Financial writer Paul Merriman put together a real-world historical chart of various levels of portfolio risk and withdrawal amounts from 1970 through 2012. You can find it through a link in this story, The Ultimate Retirement Withdrawal Strategy, written for Marketwatch:
http://paulmerriman.com/the-ultimate-retirement-withdrawal-strategy/
Check out the table that shows someone starting with $1 million and retiring in 1970. The table assumes they withdraw 5% of their portfolio each year. The 5% rule means they get larger withdrawals in years when their portfolios grow, and smaller distributions in years when they decline.
Note that portfolios that do not have a lot of stock ran out of money in a relatively short time. A 10% stock/90% bond portfolio was dissipated after 21 years. But portfolios with larger amounts of stock never ran out of money. In fact, they continued to grow while providing higher and higher distributions over the years. A 60% stock/40% bond portfolio was worth over $6.6 million in 2012, despite having allowed 5% annual distributions for 42 years. Even better, the distribution had increased from $50,000 in 1970 to $312,057 in 2012, allowing the retiree to keep up with inflation.
This was not some fairy tale period for the stock market. It went through brutal bear markets in 1973-74, 1980-81, 2001-03, and 2008-09. It suffered a spectacular one-day drop of over 23% during the Crash of 1987. It was battered by several major recessions, wars in the Mideast, some of the worst years of the Cold War, environmental disasters, a U.S. president’s resignation, and two presidential assassination attempts.
There are some drawbacks. In certain years, withdrawals decline. Due to the 1973-74 bear market, the retiree would only be able to withdraw $43,461 in 1975, less than his starting point of $50,000. But keeping to the disciplined 5% withdrawal rate allowed a retiree to recover and receive more income in subsequent years.
