Return Sequence and Volatility: Their Impact on Sustainable Withdrawal Rates

Abstract

This article explores estimates for a sustainable withdrawal rate (SWR) for a typical retiree and examines two important factors that challenge sustainability: sequence of returns and volatility of returns. Using historical analysis, the article explores the implications of sequence of returns risk and suggests strategies for countering it, including annuitization and adaptive withdrawal strategies. The article also explores volatility risk, separated as much as possible from sequence risk, and finds that the relationship between volatility, return, and SWR is not linear. In fact, for a given horizon and degree of confidence, the relationship between the Sharp ratio and the rate of return displays an inflection point, where the level of return required per unit of risk reaches a minimum.