Benchmarking Retirement Withdrawal Strategies

Capital market benchmarks are, of course, widely used yardsticks of investment performance. For the production of the S&P STRIDE Index, in addition to providing performance data we also calculate hypothetical retirement income for vintages of the index that are at, or past, their target date. Hypothetical retirement income is expressed in index points, and can be used as a yardstick for systematic withdrawal strategies – expanding the role of S&P STRIDE from wealth accumulation benchmark to decumulation benchmark.

Each January we determine the level of hypothetical retirement income for the upcoming year in every STRIDE Index whose target date is current or past. For example, in January 2015 we began calculating hypothetical retirement income for the S&P STRIDE 2015 Indices, and we continued updating it for the S&P STRIDE 2005 and 2010 Indices. Hypothetical retirement income is derived from the proportion of index value in the TIPS-LDI allocation for each target date by dividing that figure by then-current cost of income.

Below are 2015 values of hypothetical retirement income, called “Decumulation Points”, for the S&P STRIDE 2005, 2010, and 2015 Indices. These values are available on S&P STRIDE Index websites in the “Additional Info” menu. The file is called S&P STRIDE Metrics. The January 2015 Decumulation Rate is equal to [January Decumulation Points / January STRIDE Index Level].

STRIDE Vintage 2015 Monthly Decumulation Points January 2015 Decumulation Rate
2005 0.6453 5.64%
2010 0.6763 4.30%
2015 0.6818 3.46%

Source: S&P Dow Jones Indices, LLC

As explained in Waring and Siegel (2015), it is imperative to take the cost of income into account in development of systematic withdrawal policies. Doing so scales withdrawals for changes to income cost in addition to account value. However we could still be left with a lot of volatility in the periodic withdrawal a portfolio can support. To mitigate that volatility, a portfolio can be managed to offset changes in income cost with changes in account value (and vice versa) – exactly what S&P STRIDE does. For portfolio allocations pursuing strategies similar to STRIDE, our calculation of hypothetical retirement income therefore provides a sound basis for estimating how much can be withdrawn from that portfolio in a conservative, sustainable way.

The data in the above table can provide a useful comparison between one’s personal withdrawal strategy and the benchmark. For example, suppose I had $500,000 invested in TIPS at the end of January 2015. I’m pursuing an LDI strategy similar to S&P STRIDE, I retired in 2010, and I seek for my TIPS withdrawal strategy to last 25 years from retirement until 2035. In January 2015 I observe that the benchmark calculated a sustainable 2015 withdrawal rate of 4.3%. I can apply that percentage to my $500,000 TIPS-LDI portfolio to determine that the benchmark decumulation, when applied to my account, would be $21,500 for the year. Amounts greater than that may imperil the length of time my withdrawal strategy can last, and amounts less than that would potentially lengthen the time it can last. So S&P STRIDE can be used as a way to gauge sustainable withdrawals just as readily as it can be used to compare month-to-month investment performance.

The posts on this blog are opinions, not advice. Please read our disclaimers.

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