What Can I Take Out When I’m Retired?

Do Not Confuse High Returns With Sustainability

The most important measure of portfolio performance for those in or approaching retirement is return relative to drawdowns. The higher this ratio, the higher the withdrawal rate the portfolio can sustain.

The financial services industry uses a Monte Carlo simulation of possible historical outcomes to construct a "Safe Withdrawal Rate". I use a far more conservative approach which uses historical Compound Annual Growth Rates and historical Maximum Drawdowns.

I begin with every investor's worst fear ... a Bear Market which begins immediately rather than one which “possibly” occurs sometime in the future.

Sustainable Withdrawal Rate Calculation

The calculation is both simple and conservative.

  1. Account Balance – Maximum Drawdown = Remaining Balance
  2. Remaining Balance x Compound Annual Growth Rate = Average Return
  3. Average Return x .667* = Sustainable Annual Return
  4. Sustainable Annual Return / Account Balance = Sustainable Withdrawal Rate

*Leave 1/3 as a safety net for inflation, portfolio growth, and contingencies

The Conservative Logic of our SWR

  • We assume the worst case of an immediate Bear Market decline
  • The Bull Market which follows the Bear Market is likely to produce returns above the CAGR for the full Bear+Bull cycle

In short, we are building a Sustainable Withdrawal Rate which assumes the worst case for drawdowns and less than best case for returns.

Example Calculation Vanguard Balanced Index Fund (VBINX)

Time Period: two Full Market Cycles 07/31/2000 to 12/31/2016
Compound Annual Growth Rate: 5.17%
Maximum Drawdown Calculated: 32.6% (10/31/2007 to 02/27/2009)

  1. $100,000 – $32,600* = $67,400 (assume an immediate Bear Market reduces portfolio)
  2. $67,400 x .0517 = $3,485 (apply the Compound Annual Growth Rate to reduced portfolio)
  3. $3,485 x .667 = $2,324 (assume we can withdraw 2/3 of the CAGR)
  4. $2,324 / $100,000 = 2.32%

Had the Maximum Drawdown been limited to 7%+-, the Sustainable Withdrawal Rate would be 3.12%.

  1. $100,000 – $7,000* = $93,000
  2. $93,000 x .0517 = $4,808
  3. $4,808 x .667 = $3,207
  4. $3,207 / $100,000 = 3.21%


  • Given identical rates of return, the portfolio with the smallest Maximum Drawdown will provide the highest Sustainable Withdrawal Rate.
  • The Sustainable Withdrawal Rate is based on very conservative assumptions