Optimal withdrawal frequency for sustainable retirement withdrawals

Abstract

Researchers have studied factors that influence the sustainability of retirement withdrawals (e.g., withdrawal rate, withdrawal rules, volatility, asset allocation, taxes, longevity) for 30 years. The frequency of withdrawal patterns (e.g., annual, quarterly, monthly) has escaped inquiry. This study uses Monte Carlo simulation to show that, despite intuitive reasons to believe that dividing retirement withdrawals into smaller amounts over more frequent intervals might control volatility or sequence of return risk, withdrawal frequency has no effect on retirement withdrawal sustainability. This result is robust to simulated markets characterized by: (1) a random walk, (2) simulated markets that are autocorrelated, (3) historical returns series randomly chosen from historical return records, and (4) historical returns in their original sequence. It also highlights factors (e.g., time in market, matching withdrawals to spending patterns, and maximizing optionality) that can enhance value or increase retiree utility.