Skip to main content
The Globe and Mail
Support Quality Journalism.
The Globe and Mail
First Access to Latest
Investment News
Collection of curated
e-books and guides
Inform your decisions via
Globe Investor Tools
Just$1.99
per week
for first 24 weeks

Enjoy unlimited digital access
Enjoy Unlimited Digital Access
Get full access to globeandmail.com
Just $1.99 per week for the first 24 weeks
Just $1.99 per week for the first 24 weeks
var select={root:".js-sub-pencil",control:".js-sub-pencil-control",open:"o-sub-pencil--open",closed:"o-sub-pencil--closed"},dom={},allowExpand=!0;function pencilInit(o){var e=arguments.length>1&&void 0!==arguments[1]&&arguments[1];select.root=o,dom.root=document.querySelector(select.root),dom.root&&(dom.control=document.querySelector(select.control),dom.control.addEventListener("click",onToggleClicked),setPanelState(e),window.addEventListener("scroll",onWindowScroll),dom.root.removeAttribute("hidden"))}function isPanelOpen(){return dom.root.classList.contains(select.open)}function setPanelState(o){dom.root.classList[o?"add":"remove"](select.open),dom.root.classList[o?"remove":"add"](select.closed),dom.control.setAttribute("aria-expanded",o)}function onToggleClicked(){var l=!isPanelOpen();setPanelState(l)}function onWindowScroll(){window.requestAnimationFrame(function() {var l=isPanelOpen(),n=0===(document.body.scrollTop||document.documentElement.scrollTop);n||l||!allowExpand?n&&l&&(allowExpand=!0,setPanelState(!1)):(allowExpand=!1,setPanelState(!0))});}pencilInit(".js-sub-pencil",!1); // via darwin-bg var slideIndex = 0; carousel(); function carousel() { var i; var x = document.getElementsByClassName("subs_valueprop"); for (i = 0; i < x.length; i++) { x[i].style.display = "none"; } slideIndex++; if (slideIndex> x.length) { slideIndex = 1; } x[slideIndex - 1].style.display = "block"; setTimeout(carousel, 2500); } //

Norman Rothery, PhD, CFA, is the founder of StingyInvestor.com

Planning for retirement is a tricky thing. Savers face a slew of uncertainties and unknowns. Some will save too little, while others will save too much.

The retirement problem attracted the attention of computer science professor Étienne Gagnon at the University of Quebec at Montreal. He developed an approach in 2013 to withdrawing your savings over the course of your retirement and shared his results online at the Financial Wisdom Forum and Bogleheads.

Story continues below advertisement

Prof. Gagnon first considered the popular 4-per-cent retirement rule, developed in the United States by financial adviser William Bengen, and concluded it was too miserly. Mr. Bengen found that retirees were unlikely to exhaust a balanced portfolio if they set a 4-per-cent withdrawal rate at retirement and then increased it to track inflation each year thereafter.

What you need to know about saving for retirement – and building a financially secure future

Investors who employed the rule made it through some very bad historical periods, including the inflationary 1970s. But, in happier times, they would have spent too little on themselves while accumulating vast riches.

Prof. Gagnon prefers his own “variable percentage withdrawal” method instead. The basic idea is to figure out how much to take out of a portfolio over a set number of years, assuming long-term historical growth rates for a particular asset mix. The amount taken out each year varies both as the value of the portfolio changes and as the retiree gets older.

While using the approach is a little more complicated than the 4-per-cent rule, Prof. Gagnon helps by providing step-by-step instructions and a handy lookup table on the method’s homepage. The more technically minded will also enjoy his planning and back-testing spreadsheets.

While the approach typically suggests withdrawal rates of more than 4 per cent for retirees, it does so at a potential cost. Problem is, there is a good chance the dollar amount taken out of a portfolio will temporarily fall (in inflation-adjusted terms) at some point during retirement. Belt-tightening would have been required during some of the big crashes of the past.

Prof. Gagnon suggests a split solution to the problem. He thinks investors should try to cover their basic needs with income from stable sources such as pensions, old age benefits and the like. If those sources don’t cover the bare necessities, they can be bolstered with annuities. The rest of the portfolio can then be used to fund spending that can be temporarily reduced or postponed, such as travel, entertainment and other discretionary items.

You can get a sense of the risks involved by using his historical back-testing spreadsheet. For instance, I looked at the experience of a U.S. investor who started their retirement in 1955 with a $1-million portfolio that was split equally between U.S. stocks and bonds over a 35-year retirement horizon.

Story continues below advertisement

The investor had a good time of things until the 1970s when their annual withdrawals fell from an inflation-adjusted high near US$65,000 to a temporary low near US$32,000. Over all, they took out an average of about US$50,000 a year over the 35 years. (All of the returns herein are in U.S. dollars, but Canadian back-testing is also available from 1970 through 2019.)

By way of comparison, the 4-per-cent rule would have generated flat real annual withdrawals of US$40,000. The variable percentage withdrawal method provided higher spending levels overall at the cost of a few lean years along the way.

I encourage you to play with the spreadsheet to get a better sense of the market’s historical downside risk. You’ll find the 4-per-cent rule is often far too parsimonious.

Perfect planning is beyond even the best of us, but Prof. Gagon’s approach should allow investors to enjoy richer retirements while curbing risks. With a little luck, they’ll live long happy lives and none of them will wind up being interred as the richest corpse in the graveyard.

Your Globe

Build your personal news feed

  1. Follow topics and authors relevant to your reading interests.
  2. Check your Following feed daily, and never miss an article. Access your Following feed from your account menu at the top right corner of every page.

Follow the author of this article:

Follow topics related to this article:

View more suggestions in Following Read more about following topics and authors
Report an error Editorial code of conduct
Due to technical reasons, we have temporarily removed commenting from our articles. We hope to have this fixed soon. Thank you for your patience. If you are looking to give feedback on our new site, please send it along to feedback@globeandmail.com. If you want to write a letter to the editor, please forward to letters@globeandmail.com.

Welcome to The Globe and Mail’s comment community. This is a space where subscribers can engage with each other and Globe staff. Non-subscribers can read and sort comments but will not be able to engage with them in any way. Click here to subscribe.

If you would like to write a letter to the editor, please forward it to letters@globeandmail.com. Readers can also interact with The Globe on Facebook and Twitter .

Welcome to The Globe and Mail’s comment community. This is a space where subscribers can engage with each other and Globe staff. Non-subscribers can read and sort comments but will not be able to engage with them in any way. Click here to subscribe.

If you would like to write a letter to the editor, please forward it to letters@globeandmail.com. Readers can also interact with The Globe on Facebook and Twitter .

Welcome to The Globe and Mail’s comment community. This is a space where subscribers can engage with each other and Globe staff.

We aim to create a safe and valuable space for discussion and debate. That means:

  • Treat others as you wish to be treated
  • Criticize ideas, not people
  • Stay on topic
  • Avoid the use of toxic and offensive language
  • Flag bad behaviour

If you do not see your comment posted immediately, it is being reviewed by the moderation team and may appear shortly, generally within an hour.

We aim to have all comments reviewed in a timely manner.

Comments that violate our community guidelines will not be posted.

Read our community guidelines here

Discussion loading ...

To view this site properly, enable cookies in your browser. Read our privacy policy to learn more.
How to enable cookies