B ond yields today are well below historical averages. This has significant implications because portfolio returns in the earliest years of retirement have a larger impact on the likelihood that a retirement income strategy will succeed than returns later in retirement. The majority of research on sustainable withdrawal strategies has used a stochastic (Monte Carlo) simulation process based on long-term averages, whereby the expected return of an asset class is the same for each year of the simulation. While this approach is reasonable when markets are near long-term averages, we believe it is less useful when there is a significant and sustained deviation such as the current low-bond-yield market.Using an autoregressive model, we introduce a model that takes into account current bond yields and allows them to "drift" toward a higher value during retirement. This approach can better replicate the actual bond returns a current or near retiree can expect during retirement both now and in the future. We find that a 4% initial real withdrawal rate has approximately a 50% probability of success over a 30-year period. This success rate is materially lower than past studies and has significant implications on the likelihood of success for retirees today as well as how much near retirees may need to have saved to ensure a successful retirement.
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