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

Abstract

In Perfect Withdrawal in a Noisy World: Investing Lessons with and without Annuities while in Drawdown between 2000 and 2019, from the Summer 2021 issue of The Journal of Retirement, authors Andrew Clare (of Bayes Business School), James Seaton (of Solent Systematic Investment Strategies), Peter Smith (of the University of York), and Stephen Thomas (of Bayes Business School) take a new approach to determining how to draw income from retirement savings without running out of money. Many researchers have sought the perfect withdrawal rate (PWR) from a portfolio of stable assets. This may be unrealistic because many retirees invest in volatile assets like stocks.

Clare et al. analyzed how retirees would have fared by taking a PWR from a variable portfolio from 2000 to 2019. They found that due to market fluctuations, withdrawing the same amount each year increased the risk of running out of money. However, annually recalculating the PWR while reallocating assets to cash using a glidepath improved outcomes. They also considered retirees who want money left over after 20 years to buy a delayed annuity. Since annuity prices fluctuate, the amount needed is a moving target. The authors recommended taking adaptive withdrawals in conservative amounts, following a glidepath, and overestimating the eventual price of a delayed annuity.