Perfect Withdrawal in a Noisy World: Investing Lessons with and without Annuities while in Drawdown between 2000 and 2019

Abstract

This article shows how the relatively new concept of Perfect Withdrawal Rate can be used in assessing the appropriate sustainable withdrawal amounts from a pot of wealth. This concept can be applied equally to private retirement funds, endowments, and charities—and, indeed, in any context requiring regular withdrawals from an initial source of funds. The subject of estimating sustainable withdrawal rates usually falls back on describing the likely minimum safe withdrawal possibilities for various portfolio constructions over different decumulation periods. This analysis employs either a long period of historical data or a recombination of data in the form of Monte Carlo simulations. To illustrate the power of the Perfect Withdrawal concept, the article considers the case of someone who initiated retirement on January 1, 2000, at age 65 and, with the benefit of actual investment returns, assesses investment and withdrawal rate options and lessons to be learned from this experience. The article also introduces the concept and a methodology for purchasing a delayed annuity so that at age 85 (on December 31, 2019), the hypothetical retiree is fully transitioned from investment income to annuity income for the rest of their life, no matter how long that may be.

TOPICS: Retirement, pension funds, foundations & endowments, quantitative methods, simulations

Key Findings

• ▪ The introduction of delayed annuities into retirement planning helps complete analysis of the decumulation experience.

• ▪ The larger the sum required for a delayed annuity, the more variable the final withdrawals in the decumulation journey become.

• ▪ The delayed annuity purchase amount is a moving target; withdrawal amounts have to adapt in the attempt to meet the objective.