Perfect Withdrawal in a Noisy World: Investing Lessons With and Without Annuities While in Drawdown Between 2000 and 2019

31 Pages Posted: 8 Feb 2021

See all articles by Andrew Clare

Andrew Clare

City University London - Sir John Cass Business School

James Seaton

City University London - Sir John Cass Business School

Peter N. Smith

University of York - Department of Economics and Related Studies; Australian National University (ANU) - Centre for Applied Macroeconomic Analysis (CAMA)

Steve Thomas

City University London - Sir John Cass Business School

Date Written: December 14, 2020

Abstract

We show how the relatively new concept of Perfect Withdrawal Rate can be used in assessing the appropriate sustainable withdrawal amounts from a pot of wealth. This can be applied equally to private retirement funds, endowments, charities, and indeed any context requiring regular withdrawals from an initial pot. The subject of estimating sustainable withdrawal rates usually falls back on describing the likely minimum safe withdrawal possibilities for various portfolio constructions over different decumulation periods. This analysis uses either a long period of historical data or a recombination of the data in the form of Monte Carlo simulations. Here, to illustrate the power of the Perfect Withdrawal concept, we consider the case of someone who started their retirement journey on 1st January 2000, aged 65 and, with the benefit of actual investment returns, consider their investment and withdrawal rate options and the lessons we can learn from this experience. We also introduce the concept and a methodology for purchasing, a delayed annuity, such that at age 85 on December 31st 2019, our retiree had fully transitioned from investment income to annuity income for the rest of their life, no matter how long that may be.

Keywords: Sequence Risk, Longevity Risk, Withdrawal Risk, Delayed Annuities, Adaptive Withdrawals

JEL Classification: G02, G11

Suggested Citation

Clare, Andrew D. and Seaton, James and Smith, Peter N. and Thomas, Stephen H., Perfect Withdrawal in a Noisy World: Investing Lessons With and Without Annuities While in Drawdown Between 2000 and 2019 (December 14, 2020). Available at SSRN: https://ssrn.com/abstract=3748618 or http://dx.doi.org/10.2139/ssrn.3748618

Andrew D. Clare

City University London - Sir John Cass Business School ( email )

106 Bunhill Row
London, EC1Y 8TZ
United Kingdom

James Seaton

City University London - Sir John Cass Business School ( email )

106 Bunhill Row
London, EC1Y 8TZ
United Kingdom

Peter N. Smith (Contact Author)

University of York - Department of Economics and Related Studies ( email )

Heslington
York 010 5DD
United Kingdom
+44 1904 433 765 (Phone)
+44 1904 433 759 (Fax)

Australian National University (ANU) - Centre for Applied Macroeconomic Analysis (CAMA) ( email )

ANU College of Business and Economics
Canberra, Australian Capital Territory 0200
Australia

Stephen H. Thomas

City University London - Sir John Cass Business School ( email )

106 Bunhill Row
London, EC1Y 8TZ
United Kingdom
+44 (0) 20 7040 5271 (Phone)
+44 (0) 20 7040 8881 (Fax)

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