In April 2017, David Blanchett published an article in the Journal of Financial Planning called “The Impact of Guaranteed Income and Dynamic Withdrawals on Safe Initial Withdrawal Rates.” His article provides further confirmation for our continued discussion of withdrawal rates, and his objective was to quantify the relative impact of different factors on initial spending rates and acceptable probabilities of failure. He investigates the impact of five factors on optimal initial withdrawal rates:
- 1. The amount of guaranteed income,
- 2. The extent that the household can adjust spending,
- 3. The risk of the investment portfolio,
- 4. The return assumptions used for projections, and
- 5. The degree of income stability desired by the retiree.
Blanchett found the level of guaranteed income to be by far the most important factor in explaining optimal spending rates from investments. Withdrawal rates were up to four percentage points higher across the range of guaranteed income levels he examined.
He also found that withdrawal rates should be lowered for people with decreased spending flexibility (i.e., more fixed spending needs and those with a preference of stable spending over time), and…