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The past 15 years have witnessed many changes within the financial markets – some of them driven by the “fear of equities” inspired through the “ Bubble” (1995 to August 2000) and then “Crash” (Aug 2000 to September 2002), as well as the Financial Crisis meltdown (between 2007 and 2009), while others have been driven by an incredible bull market in fixed income securities (driving interest rates to historic lows).

As a consequence, the average investor has tended to adopt a less risk-tolerant profile. For example, despite warnings from almost all “experts” at the beginning of 2013 and 2014, the average investor was much more heavily invested in bonds than those “experts” would think prudent.

Given these trends in market dynamics and investor tolerance for risk, there have been significant shifts in some long-held assumptions regarding safe “withdrawal” rates.

Let me explain what I mean. When I served as CFO of a post-graduate school, we depended upon an annual “draw” from our nearly $100 million endowment fund to help fund our operating budget (those funds largely covered our scholarship costs). When I began as CFO, the “best practices” endowment withdrawal rate was 6% (on a 3 year rolling average of endowment balance). However, it soon began to be apparent that the standard needed to be lowered if we intended such withdrawal policies to be sustainable in the long-term. The experts soon moved the “best practices” rate down to 5%; while some experts even counseled lowering it to 4%. Those changes (as you can imagine) placed a severe strain upon higher education budgets.

The same principle can be applied to retirees who depend upon withdrawals from an investment portfolio to help fund their annual living expense. I was curious what current industry experts believe is a sustainable withdrawal rate in retirement.

That drew me to Steve Diltz, CFM, a Senior VP at Merrill Lynch Wealth Management who boasts over two decades of service in financial services. Steve currently has particular focus on the creation of strategies/solutions for high-net-worth individuals/families, designed to help them achieve both short-term and long-term goals.

This is what I asked Steve: What do you and Merrill Lynch believe is an appropriate withdrawal rate moving forward? We know there cannot be a firm rule for all cases, but a "general guide” would be most helpful.”

What follows is Steve’s answer:

“Many investors who are in or nearing retirement fear outliving their wealth. This concern reflects the continued erosion of traditional sources of retirement income:

1) Social Security and

2) Employer-provided Pensions.

“Many factors determine a client’s retirement outcome -- including mortality risk, investment asset allocation, market returns, a retiree’s spending level, and investment taxes and/or fees. However, only two of those factors fall under the complete control of any client:

1) spending levels and

2) asset allocation.

“With regard to the topic of optimum retirement financial planning, articles within the the press or debates among scholars often refer to a “4% withdrawal rate” as some sort of widely accepted standard or benchmark. That so-called “standard” is based upon the assumption that if a retiree limits herself or himself to spending only 4% of the investment balance each year, he/she will not outlive their total funds available. However, those of us at Merrill Lynch Wealth Management have come to believe that this “4% withdrawal rate” assumption is overly simplistic.”

In Part II, Steve will offer a detailed look at why and how this “4% level” can be misleading and ineffective as a sustainable withdrawal rate for retirees.



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