Vanguard research found that market return—which is the basis for much of Bengen’s research—is just one driver in what turns out to be a much more complex calculation. Indeed, Vanguard research has shown that three additional factors should play a prominent role in retirement withdrawal rate decisions: inflation, volatility, and stock-bond correlation.
“Much of Bengen’s research was conducted when bond yields were five to six percentage points higher than they are today,” says Andrew Clarke, CFA, a Vanguard senior investment strategist who focuses on retirement research. “Now they hover around 2.6%.”
Other researchers have explored the impact of lower yields on sustainable spending but have relied on long-term historical averages for projections on correlations and volatility. But in reality, these averages are grouping together several distinct return environments.
Clarke’s colleague, senior investment strategist Kevin Khang, Ph.D., agrees: “For our research to be relevant, it’s essential that we put ourselves in the minds of the retirees who have to think about the investment horizons that matter to them. What matters is what the return environment might look like in the next 10 to 20 years; not just a year or two out, and certainly not 80 years out.”
In short, decisions that investors make in the first decade right after retirement often matter the most—and market conditions during that time can have a massive impact on a portfolio’s long-term viability.