BUSI 688 Week 6 DB Forum 4 Example

Discussion Board Forum 4: Thread and Replies

BUSI 688 Retirement Planning, Discussion Board Forum 4 (thread and two replies)

Thread by [Student Name]

The forum topic, the retirees and the classmates are composites standing in for the course's own; the Treasury yield comes from Federal Reserve Economic Data, the projections are illustrative, and the textbook and research cited are real; the requirements follow Liberty's public course guide for BUSI 688.

Thread

The topic describes a composite couple, both 65, retiring with $1.1 million in savings, a paid-off house and combined Social Security benefits of $48,000 a year. They want to spend $90,000 a year before taxes. Dalton and Dalton (2018) teach planners to estimate retirement income needs and then fill them from guaranteed sources first. Here Social Security covers $48,000, so the portfolio must supply $42,000, about 3.8 percent of $1.1 million.

Is that safe? The 4 percent rule comes from Bengen (1994), who used historical U.S. returns to show that a retiree withdrawing 4 percent of a balanced portfolio in the first year and raising the amount with inflation would not have exhausted the portfolio within 30 years in any period he studied, provided the portfolio held a substantial share of stocks. The rule describes the worst historical outcome, not the typical one; in most periods, retirees following it ended with more money than they started with. That makes 4 percent a cautious starting point rather than a forecast, and it means a couple who follows it rigidly is likely to underspend unless a severe decline arrives.

Blanchett et al. (2013) argued that historical averages can mislead when conditions depart from the norm. Their model let bond yields start at the level available at retirement and drift over time, and it showed that low starting yields, like those of 2013, reduce the withdrawal rate a retiree can safely sustain. The couple faces a different starting point. According to Federal Reserve Economic Data, the 10-year Treasury yield averaged about 5.0 percent in September 2026, far above the levels of 2013, which supports a rate near 4 percent rather than the lower rates recommended a decade ago.

The bigger danger is a market decline in the first few years. A neighbor of mine retired in 2008, kept withdrawing a fixed amount through the crash and had to return to part-time work in 2011 when his balance fell faster than his plan allowed. The order of returns matters as much as their average once withdrawals begin.

I would recommend starting withdrawals at $42,000 with guardrails: if the portfolio falls enough that withdrawals exceed 5 percent of its value, cut spending by 10 percent; if it rises enough that they fall below 3 percent, raise spending by 10 percent. Delaying a large purchase after a bad year costs little and protects the plan. I would also set aside roughly two years of planned spending in a cash and short-bond reserve, so the couple never has to sell stocks at a low point to pay the bills.

Reply to Kim

Kim, your thread recommended a 3 percent withdrawal rate for your composite couple because markets are near record highs and a decline could come at any time. Caution is wise, and your example of a client who retired at a market peak in 2000 showed how damaging early losses can be, especially when withdrawals continue through the decline. But I wonder whether 3 percent is lower than the couple needs once their other income is counted. Dalton and Dalton (2018) emphasize building retirement income from guaranteed sources first, and your couple's Social Security and small pension cover about 60 percent of their spending, so the portfolio is a supplement, not their only support. Bengen (1994) found that 4 percent survived every 30-year period in the historical record, including retirements that began just before major declines, so 3 percent builds in a large extra margin. Blanchett et al. (2013) also show that safe rates depend on yields at the start of retirement, and with 10-year Treasury yields near 5 percent in 2026, conditions are more favorable than when lower rates were widely recommended. The risk of spending too little is real too: a couple who withdraws 3 percent may die with a large balance after denying themselves travel or help for their grandchildren. Guardrails could give you the protection you want while allowing more spending: start at 4 percent and cut after a bad year. Would that address your concern about a decline early in their retirement, while still letting them enjoy the years when they are healthiest?

Reply to Marcus

Marcus, I liked your recommendation of a dynamic spending rule that adjusts withdrawals with the portfolio's value, and your experience helping your parents trim spending after 2022 showed how a flexible plan works in practice. I would add one assumption to revisit: the length of retirement. Bengen (1994) tested 30-year periods, and many planners use 30 years as a default, but a couple retiring at 62 has a meaningful chance that at least one spouse lives into their mid-nineties, which stretches the horizon toward 35 years. Dalton and Dalton (2018) treat longevity as one of the central risks in retirement planning, and a longer horizon lowers the rate a portfolio can sustain. Blanchett et al. (2013) show that starting conditions, especially bond yields, also shift the safe rate, which supports your choice to reassess the plan regularly rather than set it once. Your rule handles market risk well; to handle longevity, the couple could delay Social Security for the higher earner, which raises inflation-adjusted lifetime income and reduces how much the portfolio must carry in the later years. They could also consider using part of the portfolio to buy a lifetime annuity at 70 or 75 if their health suggests a long life. Your rule already does the hardest part, which is getting a household to accept that spending should move with the portfolio. Would your parents' plan change if you extended the horizon to 35 years? I suspect the answer would be a slightly lower starting withdrawal and a larger role for Social Security timing, rather than a different rule altogether.

References

Bengen, W. P. (1994). Determining withdrawal rates using historical data. Journal of Financial Planning, 7(4), 171-180.

Blanchett, D., Finke, M., & Pfau, W. D. (2013). Low bond yields and safe portfolio withdrawal rates. The Journal of Wealth Management, 16(2), 55-62. https://doi.org/10.3905/jwm.2013.16.2.055

Dalton, M. A., & Dalton, J. F. (2018). Retirement planning and employee benefits. Money Education.