Bill Harris deaccumulationWilliam Bengen introduced the concept of safe withdrawal rates from retirement portfolios.


After a 286-day journey, a Lockheed-Martin spacecraft, the Mars orbiter probe, was approaching the target destination. On a key segment of the journey, the Mars probe was supposed to fire up its engines and blast itself into Mars’ orbit. Upon command, the engines fired but a major failure ensued. The spacecraft was too close to the planet. Unfortunately, it was 15 miles beneath the level at which the it could function properly, and it immediately disintegrated.

NASA lost $125 million on the Mars orbiter because a Lockheed Martin engineering team used English units of measurement while the NASA team used the metric system. The mismatch in measurement prevented shared navigation information between the Mars Climate Orbiter spacecraft team in Denver and the flight team at NASA’s Jet Propulsion Laboratory in Pasadena, California. If you use the wrong system of measurement, bad things happen.

While his classmates may have been trying to get a probe to Mars, William Bengen took a different career path. Mr. Bengen, an MIT grad in aeronautics and astronautics, and author of “Topics in Advanced Model Rocketry,” changed careers to become, of all things, a financial advisor. In 1994, he wrote one of the most influential articles ever published in the field of retirement planning. Bengen’s study introduced the concept of safe withdrawal rates from retirement portfolios. He conducted a number of simulations of historical market returns and concluded that a person could withdraw up to 4 percent annually from a portfolio without outliving their money. Mr. Bengen’s study is one of the most widely used “rule of thumb” in retirement planning.

The biggest takeaway: withdrawal rates, rather than market returns, have the biggest impact on how long funds will last.

Using the same strategy in retirement that you used to accumulated funds may not always work so well. It’s like using the English system of measurement when you should have been using the metric system; it may not end well.

Ten thousand people are turning age 65 every day in America. Seventy-one percent say their top goal for retirement is to have enough money to last their lifetime. Seventy percent of pre-retirees do not think they are well prepared for retirement; one in five feel they are not prepared at all, according to a study by YouGov Omnibus. The Baby Boom Generation is the first generation who will retire with self-directed retirement savings. While some will have conventional pensions, many will rely only on Social Security and their savings to fund their retirement.

It is not about the size of assets or rate of return that determines how long retirement funds last. What matters most is how fast assets are getting depleted. The most important factor during deaccumulation is the withdrawal rate, or WR. When it comes to retirement planning, make sure your withdrawal rate is sustainable or below sustainable (meaning you are taking out less than you should safely withdraw). If the WR is below sustainable, growth of your assets will usually continue. Bengen’s study indicated 4 percent or less is sustainable. Recent studies that correspond to our lower interest rate environment, suggest a safe withdrawal rate may be lower than 4 percent.

If your withdrawal rate is larger than sustainable (i.e., you are spending too much), your withdrawal strategy needs to change or you may deplete assets too quickly. Traditional money management strategies like asset allocation and diversification have little or no meaning if you are withdrawing funds too quickly. The key in this situation is conservation. Unfortunately, if you are spending too much, the whims of the market will ultimately determine when your assets get depleted.

Why is the math different? If you had an investment that you purchased for $10 per share and it is now $8, you lost $2 per share or 20 percent. To break-even, you need a 25 percent return (8 times 1.25 percent = $10). When you are withdrawing from your retirement funds after a downturn in the market, you create a permanent loss in the portfolio. If you have a 20 percent loss, and take a 4 percent withdrawal, you’ll need a 32 percent gain to recover. You need to recover from the initial loss, as well as from additional losses that result from withdrawals.

Hopefully, it’s obvious, but there’s less principal at work in a retirement portfolio after a withdrawal. Hence, recovery in a distribution portfolio is a lot harder than in an accumulation portfolio. To further compound matters, imagine the market’s recovery takes a couple of years like it did during the dot com bubble (2000, 2001, 2002 were all down years). Recovery gets even harder, and principal, especially if withdrawals continue, can spiral downward quicker than our aforementioned Mars probe.

If you want your golden years to be golden, know what your safe withdrawal rate is and stick to the plan.

Bill Harris is a certified financial planner practitioner. He is the chairman of the Financial Planning Association of Massachusetts and an Ed Slott Elite IRA Advisor. He is a co-founder and principal of WH Cornerstone Investments in Duxbury and Kingston, a firm dedicated to empowering people to see their future as greater than their past. Bill is passionate about empowering widows with their financial future, and his award-winning email newsletter offers helpful advice and articles for widows looking to rebuild their financial and personal life. He can be reached at, p: 888-797-9009, Twitter @whcornerstone or @billmharris.

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