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A Retrospective Review … and Implications for Modernity

[Copyright Manning & Napier Advisors, Inc.]

Dr. Jeff Coons

By Jeff Coons PhD CFA

By Dr. David Edward Marcinko MBA CMP

The general trend of declining interest rates experienced over the last several decades, part of a long-term trend Manning & Napier Advisors, Inc. and others have focused on since the early 1980’s, created new challenges for managing investment portfolios with regular and significant cash withdrawals.

Historical Review

This continuing report, first prepared 15 years ago, will provide an analysis of the investment implications of withdrawals in light of the secular shift in the economic and market conditions today. This analysis and historical review aims to guide decisions as to the appropriate level of withdrawals from an account in the more current low interest rate environment of 2014; and thru currently to 2019.

The Questions

Declining interest rates restrict the ability to generate income from high quality investments, so a greater proportion of a given withdrawal requirement must come from the potential price appreciation of the securities.  Of course, the inherently volatile nature of the financial markets makes price appreciation the less predictable of the sources of total return available to fund withdrawal needs.

The natural questions that arise from this observation include:

  • What withdrawal rate inhibits the ability to pursue long-term capital growth as a primary investment objective?
  • What withdrawal rate may create a significant risk of a sustained deterioration of capital?
  • What is a reasonable range of withdrawal rates given the relatively low interest rate environment that we face? 

The answer to the first question can be derived from interest rates and dividend yields.  With a dividend yield of 1.0%-2.0% on stocks (e.g., the yield on the S&P 500 Index as of December 2000 was 1.2%) and yields on intermediate-term and long-term fixed income securities between 5.0% and 6.0% (e.g., as of December 2000, a one-year Treasury Bill had a yield of 5.4% and a thirty-year Treasury bond had a yield of 5.5%), growth-oriented portfolios should generally produce a level of income adequate to allow 2.5%-3.5% withdrawals on an annual basis.

Thus, rates of withdrawal of less than 3.5% generally should not inhibit the pursuit of long-term capital growth as a primary investment objective.


Portfolio analysis


Management Aproach

To establish the high end of the achievable withdrawals under a management approach pursuing long-term capital growth, consider some historical evidence.

Assume that withdrawals are taken from each of three portfolios (i.e., 100% stocks, 80% stocks/20% bonds, and 50% stocks/50% bonds using data from Ibbotson Associates, Inc.) starting at the beginning of 1973.  How many years did it take to regain the original capital of the portfolio?

As can be seen in the following table, it took between 4-8 years for these portfolios to recover from the 1973-74 bear market with a 5.0% withdrawal rate.  If withdrawals are at a 7.5% rate per year, over ten years elapsed before the original capital was restored.

Finally, with a 10.0% withdrawal rate, it took between 13-15 years to restore the capital.  While the 1973-74 bear market was severe, it is not the worst bear market that can be used to illustrate the risk of significant withdrawals taken when the portfolio’s market value is depressed.

The clear conclusion is that withdrawals of greater than 5.0% are a potential impediment to pursuing long-term capital growth, given the long periods required to restore capital for the various growth-oriented asset mixes offered in this analysis.


When Was Original (12/72) Capital Restored?
  1. 0% W/D

  1. 5% W/D

  1. 0% W/D
 100% Stock  9/80(7.75 years) 6/83(10.5 years) 6/86(14.5 years)
80% Stock/ 20% Bond  9/80(7.75 years) 3/83(10.25 years) 6/86(14.5 years)
50% Stock/ 50% Bond  12/76(4.0 years) 3/83(10.25 years) 3/87(15.25 years)


Another key issue to remember is that the withdrawal rates above are a percentage of current market value, so the dollar value of the cash withdrawn from the account is assumed to decline in a bear market.  However, most of us think of our withdrawal needs in terms of dollars instead of percentages (e.g., $50,000 from a $1,000,000 account, which translates to 5%).

If we attempt to maintain the dollar value of withdrawals in bear market periods, the percentage of current market value being withdrawn actually increases, and the impact on the portfolio far exceeds the example provided above.


To demonstrate, consider maintaining withdrawals of $50,000, $75,000 and $100,000 on an account with a $1,000,000 market value as of 12/72 (see table below).

In the case of a $50,000 annual withdrawal, approximately 8-10 years elapse before the original $1,000,000 market value is restored.  If the withdrawals are $75,000 per year, 13 years elapse for the 50/50 asset mix and almost 19 years pass for the 80/20 asset mix before the $1,000,000 is restored.  For the 100% stock portfolio, nearly 25 years elapse before the original $1,000,000 is restored.

Finally, for $100,000 withdrawals off of a $1,000,000 market value in 1972, all capital in the account is depleted within 10-15 years given these withdrawals.  Thus, the risk of significant cash withdrawals having a detrimental impact on the ability to preserve and grow capital is much more pronounced when withdrawals remain high in dollar terms.


When Was Original Capital ($1,000,000 in 12/72) Restored?
$50,000 W/D  $75,000 W/D  $100,000 W/D
 100% Stock  3/83(10.25 years) 9/97(24.75 years) Capital Depleted9/83
80% Stock/ 20% Bond  12/80(8.0 years) 9/91(18.75 years) Capital Depleted3/85
50% Stock/ 50% Bond  9/80(7.75 years) 3/86(13.25 years) Capital Depleted9/87


So far, the major point we have established is that a withdrawal rate of 2.5%-3.5% may be achievable without hampering the pursuit of long-term capital growth, but withdrawals of 5% or greater may have a significant impact on the ability to manage for growth.  Therefore, accounts expected to experience withdrawals of 4%-5% (or greater) should be managed with a goal of satisfying these withdrawal needs on a regular basis first, with the pursuit of capital growth taking secondary importance.

However, the analysis provided above also implies that there is a rate of withdrawals that forces us to focus on capital preservation, because depletion of capital is a likely outcome.  For withdrawals in the range of 10.0%, the example above shows that the risk of depletion of capital is significant at these high annual levels, especially if the withdrawals are on a dollar basis and not adjusted by the decline of current market value in a bear market.

In fact, with long-term U.S. government bond yields at approximately 5.0%-6.0%, annual withdrawals greater than 7.5% are likely to be too high to allow a manager to effectively pursue long-term capital growth without a high degree of risk to the capital of the account.  That is, since attempts to provide returns above the current Treasury yields imply risk of volatility, and volatility can lead to the examples provided above, withdrawals at 7.5% or more and maintained on a dollar basis imply a high likelihood that original capital will be depleted over a 15-20 year period.

In general, the current level of yields in the market imply that management of a portfolio requiring over 7.5% per year in withdrawals faces a strong possibility of depleting capital under any scenario, and so portfolio management should focus on dampening market volatility so as to extend the life of the capital for as long as possible as it is drawn down.

Final Questions

The final question[s] (i.e., the appropriate level of withdrawals) is driven by both the client’s need for the assets and the parameters outlined above:

  1. Withdrawals less than 3.5% of current market value should not inhibit the pursuit of long-term capital growth as a primary objective.
  2. Withdrawal rates between 3.6% and 7.4% require a primary focus on satisfying withdrawal needs over the market cycle, possibly with a secondary goal of long-term capital growth to protect future withdrawal needs.
  3. Withdrawal rates greater than 7.5% are likely to result in a depletion of capital, so the goal should be to manage the drawdown of capital by dampening year-to-year volatility of the portfolio.

While we all would like to achieve capital growth, the ability to pursue growth-oriented strategies depends on the flexibility to moderate withdrawals, if required by market conditions, and on the overall reliance on these assets.

As another example, an endowment can control its withdrawals to some extent, but there is a level beyond which the belt cannot be tightened without harming the services being funded.

Yet another example comes from a physician-executive or someone living primarily on an IRA account, especially after becoming accustomed to the high (and falling) interest rate/high asset return environment of the last fifteen years.  Aggressively pursuing capital growth in the face of large withdrawals may result in exposure to significant risk of depletion of the IRA assets when other sources of income are unavailable.

If, on the other hand, the IRA was a small part of the wealth available in retirement, then there is some flexibility to work towards long-term capital growth.

Financial Planning MDs 2015

Implications for defined benefit retirement plans

A defined benefit retirement plan may have an outside source of funding to help restore capital (i.e., contributions from the employer), but defined contribution and Taft-Hartley plans have much less of a safety net.  As a result, the risk taken to pursue growth in the face of significant withdrawals must take into account the nature of the assets and the problems associated with a deterioration of capital in the account.


And so, withdrawals can have a significant impact on the ability of a manager to preserve capital and pursue long-term capital growth.  However, while lessening the level of withdrawals will help provide flexibility for the manager to pursue these goals, the need for the assets may require that withdrawals are maintained at a certain level.  Once withdrawals are minimized, the manager should focus on investment goals that correspond with this minimum level.

If withdrawals are below 3% of current market value, pursuit of long-term capital growth can be a primary objective.  Withdrawals between 4% and 7.5% of market value on an annual basis require a focus on working towards satisfying these annual needs.  Long-term capital growth, in this case, should be a secondary goal.

Finally, if withdrawals are above a 7.5% annual rate, then the investment management approach should focus on preserving capital and dampening market volatility so as to work towards allowing the assets to last as long as possible as they are drawn down.

NOTE: The 10-year Treasury rate’s just fell below 2% after Fed, ECB nominees; today.


This historical review paper provides a retrospective review of IRs and implications for modernity.

Your thoughts and comments on this ME-P are appreciated. Feel free to review our top-left column, and top-right sidebar materials, links, URLs and related websites, too. Then, subscribe to the ME-P. It is fast, free and secure.

Speaker: If you need a moderator or speaker for an upcoming event, Dr. David E. Marcinko; MBA – Publisher-in-Chief of the Medical Executive-Post – is available for seminar or speaking engagements. Contact: MarcinkoAdvisors@msn.com

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One Response

  1. Excellent Medical Executive-Post,

    So Jeff, if you want to lower the volatility of your portfolio, diversify within and among asset classes. That means owning funds instead of individual stocks, and owning multiple asset classes instead of just one: a portfolio of emerging markets stock and bond funds, plus domestic stock and bond funds. As always, keep your fees low.

    For example, Vanguard projects returns for a balanced portfolio of 60 percent stocks and 40 percent bonds over the next 10 years to range from –3 percent to 12 percent, with the most likely scenario between 1.5 percent and 7.5 percent a year on an annualized basis.

    Equities alone are forecast to have a return centered on the 6 percent to 9 percent range, but with a possible swing from year to year of a full 18 percent. Bonds expected returns are centered in the 1.5 percent to 3 percent range.

    The translation is that you’ll probably earn nearly as high returns with a balanced portfolio, but you’ll face much less volatility.

    Dr. Cargile


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