Retirement money withdrawal strategyRunning Out Of Money: Retirement Withdrawal Strategies in a Low-Interest Rate Environment

Here’s the question I get most often: What percent of my retirement funds can I safely withdraw without fear of running out of money?

A close second is: How can I generate enough income from my portfolio in this low-interest-rate environment?

Understanding the role bonds play in your portfolio is critical to both of these questions.
Bonds (including treasuries) should not be viewed as a source of income. Their proper function is to reduce the volatility (risk) of the stock portion of your portfolio and to assist in protecting you against the ravages of inflation.

Your portfolio should consist of globally diversified, high-quality, low-cost stock and bond index funds in an asset allocation appropriate for your investment objectives and tolerance for risk. You can determine your asset allocation by taking the risk capacity survey available on my website.

The fixed-income portion of your portfolio should be limited to bond funds with short and intermediate maturities of five years or less. If you buy bonds with longer maturity dates, you incur “interest rate risk.” If rates rise, the value of your bond holdings will decline.

Short- and intermediate-term bonds act as an inflation hedge, because inflation means higher interest rates. Holders of these bonds are well positioned to take advantage of these rates as their bond funds mature because the funds will reinvest in higher-yielding bonds.

You should consider the following bond index funds, which may vary slightly in their holdings from these criteria:

  • Vanguard Total Bond Market Index (VBMFX)
  • Fidelity U.S. Bond Index (FBIDX)

One problem with these funds is their holdings are limited to U.S. treasuries and investment-grade bonds of U.S.-based companies. Ideally, the bond portion of your portfolio should be globally diversified, just like the stock portion.

Dimensional Fund Advisors as well as other mutual fund companies including Vanguard and Fidelity offer low-cost, short- and intermediate-term passively managed bond funds that are globally diversified. However, access to Dimensional’s funds is limited to investors who use registered investment advisers approved by the company. (Full disclosure: I am a senior vice president of Index Funds Advisors, which is a Dimensional-approved investment adviser.)

Don’t be tempted by bond funds promising outsized returns. Higher returns with bond or bond funds always signal a higher risk of default.

It is only after you have the right portfolio, in an appropriate asset allocation, that you can confront the issue of how much you can withdraw.

The bottom line? Noted financial author William Bernstein said it best: “Two percent is bullet-proof, 3 percent is probably safe, 4 percent is pushing it and, at 5 percent, you’re eating Alpo in your old age.”

Bernstein calculated that if you live into your nineties and take out 5 percent a year, you have a 50 percent chance of running out of money.

Note that these guidelines apply to the total amount of your retirement assets and not just to the fixed-income portion. Your focus should be on maximizing the amount of your overall portfolio and not on using bonds as the sole source of your income requirements.


Dan Solin is a best-selling author, a wealth advisor with Buckingham, and the director of investor advocacy for the BAM Alliance.

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