Journal of Financial Services Marketing

, Volume 19, Issue 4, pp 291–303 | Cite as

Improving retirement adequacy through asset class prioritization

  • Michael E Drew
  • Adam N Walk
  • Jason West
  • John Cameron
Original Article


Highly risk-averse retirees are generally advised to adopt a fixed spending strategy such as the 4% withdrawal rule. To prevent the premature depletion of a retirement portfolio, the rule attempts to proxy as the ‘safe withdrawal rate’. But a constant withdrawal rate means that retirees accumulate unspent surpluses when markets outperform and face spending shortfalls when markets underperform. While a safe withdrawal rate can prevent spending shortfalls, the opportunity cost of unspent surpluses associated with this strategy can be extreme. We apply a range of basic investment decision rules to a retirement portfolio applying various withdrawal rates and examine the probability of shortfalls over a retirement horizon. Using a block bootstrap simulation technique, we examine decision rules relating to stock and bond investments. Our results show that retirement portfolios with a bias towards stocks coupled with a decision rule that sources withdrawals from bonds and cash before stocks significantly outperforms alternative withdrawal strategies, despite the inherent increase in volatility. This finding is in direct contrast to the safe withdrawal rate conventions used in contemporary financial advice models.


safe withdrawal rate retirement planning superannuation dissimulation phase dividend imputation 


  1. Basu, A. and Drew, M.E. (2009) Portfolio size and lifecycle asset allocation in pension funds. Journal of Portfolio Management 35 (3): 61–72.CrossRefGoogle Scholar
  2. Basu, A., Doran, B.M. and Drew, M.E. (2013) Are target date funds the easy bake option? Journal of Financial Services Marketing 18 (3): 199–206.CrossRefGoogle Scholar
  3. Bengen, W.P. (1994) Determining withdrawal rates using historical data. Journal of Financial Planning 7 (4): 171–180.Google Scholar
  4. Bengen, W.P. (2006) Baking a withdrawal plan ‘layer cake’ for your retirement clients. Journal of Financial Planning 19 (8): 44–51.Google Scholar
  5. Cooley, P.L., Hubbard, C.M. and Walz, D.T. (1999) Sustainable withdrawal rates from your retirement portfolio. Financial Counseling and Planning 10 (1): 39–47.Google Scholar
  6. Cooley, P.L., Hubbard, C.M. and Walz, D.T. (2003) Does international diversification increase the sustainable withdrawal rates from retirement portfolios? Journal of Financial Planning 16 (1): 74–80.Google Scholar
  7. Drew, M.E. and Walk, A. (2014) How Safe are Safe Withdrawal Rates in Retirement? An Australian Perspective. Sydney, Australia: Finsia (Financial Services Institute of Australasia).Google Scholar
  8. Efron, B. (2003) Second thoughts on the bootstrap. Statistical Science 18 (2): 135–140.CrossRefGoogle Scholar
  9. Efron, B. and Tibshirani, R.J. (1993) An Introduction to the Bootstrap. London: Chapman and Hall.CrossRefGoogle Scholar
  10. Finke, M., Pfau, W.D. and Blanchett, D.M. (2013) The 4% Rule is Not Safe in a Low Yield World. Texas Tech University, Lubbock TX, USA, SSRN Working paper.Google Scholar
  11. Gough, O. and Nurullah, M. (2009) Understanding what drives the purchase decision in pension and investment products. Journal of Financial Services Marketing 14 (2): 152–172.CrossRefGoogle Scholar
  12. Guyton, J.T. and Klinger, W.J. (2006) Decision rules and maximum initial withdrawal rates. Journal of Financial Planning 19 (3): 48–58.Google Scholar
  13. Jarrett, J.C. and Stringfellow, T. (2000) Optimum withdrawals from an asset pool. Journal of Financial Planning 13 (1): 80–93.Google Scholar
  14. Künsch, H.R. (1989) The jackknife and the bootstrap for general stationary observations. The Annals of Statistics 17 (3): 1217–1241.CrossRefGoogle Scholar
  15. Lamberton, D.McL. (1958) Security prices and yields, Part III. Sydney Stock Exchange Official Gazette 15 December: 556.Google Scholar
  16. Lee, A. and Xu, Y. (2013) Factors influencing investor choice of retirement funds. Journal of Financial Services Marketing 18 (2): 137–151.CrossRefGoogle Scholar
  17. Milevsky, M.A. (2006) The Calculus of Retirement Income – Financial Models for Pension Annuities and Life Insurance. New York: Cambridge University Press.CrossRefGoogle Scholar
  18. Pfau, W.D. (2010) An international perspective on safe withdrawal rates: The demise of the 4 percent rule? Journal of Financial Planning 23 (12): 52–61.Google Scholar
  19. Pfau, W.D. (2011) Can we predict the sustainable withdrawal rate for new retirees? Journal of Financial Planning 24 (8): 40–47.Google Scholar
  20. Pye, G.B. (2000) Sustainable investment withdrawals. Journal of Portfolio Management 26 (4): 73–83.CrossRefGoogle Scholar
  21. Roy, A.D. (1952) Safety first and the holding of assets. Econometrica 20 (July): 431–449.CrossRefGoogle Scholar
  22. Ruiz, E. and Pascual, L. (2002) Bootstrapping financial time series. Journal of Economic Surveys 16 (3): 271–300.CrossRefGoogle Scholar
  23. Scott, J.S., Sharpe, W.F. and Watson, J.G. (2009) The 4% Rule – At what price? Journal of Investment Management 7 (3): 31–48.Google Scholar
  24. Zolt, D.M. (2013) Achieving a higher safe withdrawal rate with the target percentage adjustment. Journal of Financial Planning 26 (1): 51–59.Google Scholar

Copyright information

© Palgrave Macmillan, a division of Macmillan Publishers Ltd 2014

Authors and Affiliations

  • Michael E Drew
    • 1
  • Adam N Walk
    • 1
  • Jason West
    • 1
  • John Cameron
    • 1
  1. 1.Bond UniversityAustralia

Personalised recommendations