Measuring Success in Decumulation: The Minimum Acceptable Annual Withdrawal Rate (MAAW)

Abstract

This paper proposes a new method of assessing the sustainability of withdrawals from a given pot of wealth in retirement or indeed in any similar context such as intergenerational family wealth or charity/endowment spending. We use the recent concept of Perfect Withdrawal Rates to assess appropriate withdrawal amounts year by year based on changing returns and (probably) in conversation with an adviser. The preferred withdrawal strategy is ‘adaptive’ and the focus here is on devising a new measure of success of a portfolio retirement strategy which reflects the aspirations of both retiree and adviser in their practical communications. We introduce a new measure of success to gauge how well a withdrawal strategy performs against a target withdrawal amount, the Minimum Acceptable Annual Withdrawal Rate (MAAW). We suggest that this offers a very practical and intuitively appealing measure of success for the performance of portfolios in the decumulation context.

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

JEL Classification: G10, G11, G22