Empirical determination of sustainable withdrawal rates considering historical yields and inflation rates in Germany

Alexander Dziwisch,Philippe Krahnhof,Alexander Zureck

doi:10.1007/s12297-021-00504-1

Abstract

On account of the current low interest rate phase, which is most likely to continue in the coming years, the average yields to be achieved in the bond, time deposit and savings product sectors are declining, so that risk-averse investors in particular have few opportunities to generate return-oriented retirement provisions.This scientific article analyzes the level of a possible safe withdrawal rate for diversified pension portfolios, considering historical returns and inflation rates. Consequently, this article provides immediate practical added value for a possible retirement provision.The evaluation is based on the consideration of historical returns of the stock and bond market in Germany. To determine a safe withdrawal rate, the development of portfolios with different compositions and inflation-adjusted withdrawal rates are simulated over periods of 15 to 35 years. In this simulation, the risky part of the portfolio is represented by German equities, the low risk part by German government bonds.To sum up, the empirical results show a maximum safe withdrawal rate of 4%. The underlying portfolio is composed of 50% equities and 50% government bonds. Particularly due to the outlined demographic change in Germany as well as the ongoing low-interest phase, the empirical study can provide significant theoretical and practical insights.

Highlights

Low birth rates and increasing life expectancy have led to a demographic change taking place in Germany
The evaluation is based on the consideration of historical returns of the stock and bond market in Germany
The risky part of the portfolio is represented by German equities, the low risk part by German government bonds

Summary

Introduction

The net pre-tax pension level has fallen from 55.0% in 1990 to 48.2% in 2020 (Bundesministerium für Arbeit and Soziales 2019). No statutory lower limit is envisaged for the development of the pension level from 2030 (Deutsche Rentenversicherung Bund 2019). The risk of poverty in old age outlined above is further exacerbated by the financial situation on the money and capital markets, as the current yields on call money, fixed-term deposits or checking accounts, as well as savings accounts, are around 0% due to the loose monetary policy of the European Central Bank. German households are increasingly investing in the capital market and in some cases moving away from traditional forms of investment such as real estate, life insurance and home

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