A New Tool to Visualize Retirement Planning

Bill Bengen’s research calculated how much a retiree can take out safely from a generic portfolio over 30 years without running out of money. Depending on the asset allocation, the safe withdrawal rate has variously been computed at 4% of the initial portfolio, with the dollar figure indexed for inflation thereafter, or 4.5% if the portfolio is more broadly diversified.

But wouldn’t it be nice if you could take a prospective client’s asset allocation and calculate the percent of time periods since 1926 that it would have survived a 30-year retirement?

You would be able to show a client who has a high percentage of fixed income that the odds are less than she might think. Better yet, you could vary the withdrawal rates, the length of the retirement, the asset allocation or the annual portfolio expenses, all right there on the screen, and see the odds of success change instantly as you change the key assumptions.

This is not a fantasy.

Enter the Big Picture, which lets you build and back-test portfolios using historical total-return data from 11 different asset classes since January 1926. While you’re playing with the variables, you can also define the rebalancing frequency and set a dollar figure on the legacy you want to leave to heirs.

Let’s say you create a balanced portfolio in the software which is 15% allocated to 5-year Government bonds, 15% to 10-year Government bonds, 10% to global bonds, 20% to large-cap stocks, 15% each to mid-cap and small-cap U.S. stocks, and 10% to international (ex-USA) stocks. You set the withdrawal rate at 4%, inflation-adjusted, and the program calculates that since 1926, this portfolio would have sustained that withdrawal rate over 30 years 100% of the time. Raise the retirement period to 40 years and you still have a 97% success rate, historically.