Long-Term Equity Investing and Withdrawal Rules: How Not to Die Penniless

Abstract

This paper provides evidence on the outcomes of several different withdrawal policies for a long-term equity investor with a motive to preserve the real value of their assets and maximize the withdrawals. Using data for the US and Finnish stock markets from 1913 to 2023, we find that historically the maximum endowment-preserving withdrawal rates would have been 1.83 and 10.95 percent of the initial investment at the end of 1912 for Finland and the US, respectively. The maximum withdrawal rate varies with the timing of the initial investment. The average maximum withdrawal rates for the first one hundred years are 6.63 percent for Finland and 7.79 percent for the USA. A rearview look shows that following a rule where the withdrawal is a given fixed rate of the nominal value of the portfolio all the while either disallowing reductions in nominal withdrawals (Finland) or keeping them at least 90% level of the previous nominal withdrawal (USA), would have historically provided the highest average withdrawals in real terms. Looking forward, both countries offer withdrawal rates of four or even five percent with reasonable risk if one allows the withdrawals to be adjusted for stock market development.

Keywords: withdrawal, endowment, long-term investing, stock market

JEL Classification: G11, G23, N3