Dear Bill,
Thank you for your invaluable work and accessible writing style!

I understand that a Safemax changes over a portfolio life given changing underlying returns. However, what’s unclear to me is whether one changes their withdrawal percentage away from the 4.7% (assuming the standard configuration plus COLA adjustment to the original percentage notional)?  J.

 

Dear J.,

Thanks for your note and your interest in my research.

Actually, technically speaking, SAFEMAX never changes. It is the withdrawal rate at the very start of retirement, which could be any value from about 4% to more than 20%.

What does change is the Current withdrawal rate, or CWR, which needs to be calculated each year and compared to the benchmark CWR curve. CWR is merely the value of this year’s collar withdrawal, divided by the portfolio value at the start of the year. In year #1, by definition, CWR and SAFEMAX are identical. Over time, CWR will grow and eventually, in the last year of retirement, it will reach 100%, or slightly more.

It’s important to compare your actual CWR with your theoretical CWR (from “the Curve’) on a regular basis. In the short term, due to stock bear markets, actual CWR may deviate significantly from theoretical CWR. However, as the stock market recovers, the gap should close, although that could take five years or more. Deviations due to a sudden and prolonged inflation, as in the 1970s, need to be treated more seriously.

Best regards,

Bill Bengen