Speaking at a Finsia lunch in Sydney yesterday, Griffith University professor of finance Michael Drew launched the Finsia-published research paper How Safe are Safe Withdrawal Rates in Retirement? An Australian Perspective.
As the basis for the research paper, Mr Drew pointed to a 1994 article by William Bengen in the American Journal of Financial Planning.
"[Bengen] said that assuming a minimum requirement of 30 years of portfolio longevity (i.e. income) a first-year withdrawal of four per cent followed by an inflation- adjusted withdrawal [of the same amount] in subsequent years should be safe," said Mr Drew.
While there is "voluminous" amounts of research on Bengen's so-called 'golden rule' in the US, there is very little in Australia, he said.
The empirical section of the Finsia research paper is "somewhat cheekily" entitled 'Why Australia may be the worst case study for safe withdrawal rates', given that Australia has had the best performing stock market in the world over a period of 112 years, ended 2011.
But even with the strong performance of the the Australian stock market, the research modelling shows there is still some chance of 'portfolio ruin' for investors after 20 years when they are using the four per cent rule, said Mr Drew.
"We can find a golden rule not of four per cent but of about three per cent in Australia. If you are willing to accept a bit of 'portfolio ruin' probability we can get it to about 3.5 per cent," he said.
The so-called 'SAFEMAX' withdrawal rate (i.e. the highest withdrawal rate that ensures portfolio 'survivability') for Australia with a 50/50 growth/defensive portfolio is 2.96 per cent. The SAFEMAX withdrawal rate with a 10 per cent chance of portfolio ruin is 3.62 per cent, according to the research.
Despite this, the four per cent rule can still be used as a heuristic "line in the sand" for retirees, said the study.
"The four per cent rule helps us engage cognitively in the retirement income problem which ... is simultaneously complex and dynamic in nature," it said.
