Using the Minimum Acceptable Annual Withdrawal with the Perfect Withdrawal Rate Rule

Abstract

This study shows how to use the concept of Perfect Withdrawal Rates to quantify appropriate retirement withdrawal amounts year by year based on changing returns and (probably) in conversation with an adviser, using both historical strings of returns and Monte Carlo simulations. The authors show how the ‘strings’ approach is superior (i.e., more ‘realistic’) in practice to Monte Carlo. The preferred withdrawal strategy is ‘adaptive’ as information is updated, and their suggested measure of success is how well a withdrawal strategy performs against a targeted withdrawal financial amount, most likely chosen in discussion between a retiree and an advisor, and which is labelled as the minimum acceptable annual withdrawal (MAAW) rate. The authors suggest that this offers a very simple, practical, and intuitively appealing measure of success for the performance of portfolios in the decumulation context. They also discuss the use of delayed and deferred annuities in this context, as well as the associated target residual financial sum.