Stress-Test Your Retirement Savings

The study aims to establish the probability of running out of money in retirement based on changes in asset returns and withdrawal rates. Dot.com bubble imploding in early 2000s, real estate prices collapsing, and credit freeze in late 2000s, COVID pandemic in 2020 should alert anyone to reassess the risk of experiencing these crises during retirement, especially the longer you live. Many types of stress tests can be done for a retirement portfolio. Stress testing a retirement portfolio involves evaluating its resilience and performance under various adverse scenarios. Withdrawal rates impact the likelihood of running out of wealth late in life. Factors such as expected returns on assets, withdrawal size, retiree's tolerance for risk, and asset allocation may interact to determine the optimal withdrawal rate. This study seeks to establish the probability of running out of money based on changes in the two parameters of asset returns and withdrawal rates. If 75% to 95% estimates are considered for acceptable success rates, withdrawal rates between 3% and 4% can be recommended for a 30-year withdrawal period based on the simulation results, depending on risk tolerance. However, the results for a 5% withdrawal rate show that the highest success rate of nearly 58% is achieved. Consequently, a withdrawal rate of 5% is only suitable for risk-tolerant investors. Keywords retirement planning, investing, asset allocation, withdrawal rates