Risk of Ruin | Retirement Investing

Friday, May 30, 2008 | Home | Andy Mayo

The concept of risk of ruin is important to more than poker players.  Anyone in or nearing retirement ought to understand this important concept.  And it's easy to do.  Simply read my new article on Risk of Ruin at Investopedia, a Forbes Media Company.

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4 responses to: "Risk of Ruin | Retirement Investing"

Tuesday, June 3, 2008 Michael Dallas says: Good analysis except for one point. Your article says, "According to William Bernstein's book 'Four Pillars of Investing' (2002)... No asset allocation avoids bankruptcy when a 4% withdrawal rate is applied to a $1 million portfolio using returns from that time period." While you accurately quoted him, he is probably incorrect. My analysis indicates that an all "value" portfolio (e.g. as defined by Fama French, Ibbotson & Associates, etc.) endures periods from 1966 forward (assuming a 30 year retirement). Moreover a "value" portfolio outperforms the success rate(i.e. avoiding ruin) and ending values of an S&P portfolio over most 30 year periods from 1928 forward.

Monday, June 2, 2008 John says: Your analysis is correct assuming a 10% withdrawal rate, adjusted for inflation each year. This is NOT, however, the 4% solution many advisors recommend. As the name implies, it assumes a 4% withdrawal of the original principal amount each year. Of course, if one arbitrarily bumps up the withdrawal rate, you can show ruin much easier, as you have. Why not just go to 100% withdrawal rate and get it over with after one year? I would expect better explanation / analysis than this.

Sunday, June 1, 2008 shortseller says: Nice simple article with straightforward example -- no Martingale theory or Markov walks. Next step is to show how rebalancing across bonds/stocks helps to mitigate RoR.

Sunday, June 1, 2008 john noonan says: I just read "The Risk of Ruin for Retirees". Your fourth concept is nothing more than market timing - cutting a loss sounds great, but when do they get back in? Academia has proven timing to be a loser's game, no matter how smart someone is or thinks he is, or how much money and time he throws at research. The article was great until then. Nice work - but I just get nervous thinking of the folks who now believe they need to guess when "a good time" to invest is. Please be careful! Take care, John Noonan

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