How to Determine a Sustainable Level of Retirement Spending

What is the probability that a given level of spending is realistic or “sustainable” throughout one’s retirement?

Stated differently, what is the likelihood that a given level of retirement spending is fraught with longevity risk and will result in financial ruin—with ruin defined as the depletion of assets during one's lifetime?

A responsible or sustainable level of retirement spending is a fundamental financial planning exercise and should serve as a starting point for considerations of whether and how one might use an annuity.

While it is not possible to answer this question with certainty, there are methods that provide probabilities that can serve as the basis for informed, responsible decisions.

For example, a withdrawal or retirement spending rate that results in a 30% probability of ruin is likely a red flag and completely unacceptable to most people.  On the other hand, a 3% probability of financial ruin is likely an acceptable risk.

Consider the following example through the lens of a very interesting and powerful tool developed by the Quantitative Wealth Management Analytics Group or “Qwema” Group (

  • John is 60 years old and is in relatively good health for his age.
  • John’s current investable wealth is $750,000.
  • John intends to retire and start withdrawals from his investment portfolio in 5 years at age 65.
  • At 65, John will receive $20,000 per year in Social Security payments.  Unlike the current environment, most years John’s Social Security payments will receive cost of living adjustments based on increases in the consumer price index (CPI).
  • John has no additional sources of income (e.g. he does not have a defined benefit pension plan).
  • Additional assumptions are as follows: the CPI will average 4%; the expected annual return from John’s investment portfolio is 6%; John wants his annual spending rate to keep pace with the rate of inflation as measured by the CPI (4%), and; the volatility or standard deviation of John’s projected portfolio return is 20%.

The following are the probabilities of ruin and associated probabilities of success (1 – probability of ruin) associated with several fixed levels of annual spending John is considering for his retirement years:

Clearly there are a number of critical assumptions that are driving the above results—key among them are desired cost of living adjustments (4%), expected investment returns, and the volatility of the overall portfolio.  John’s asset allocation and investment decisions are important here, but as we have seen over the past couple of years, much of the capital market activity is out of one’s control.

What is within John’s direct control is the level of spending in retirement, and as the results indicate, an annual retirement spending rate of $30,000 is the only of the four options that appears reasonable.  


Just assumptions.

Social Security income would obviously keep pace with the CPI since it is pegged.

Also assumed that, at a minimum, the person would want their systematic withdrawals to keep pace with general rate of inflation as measured by the CPI.

COLA less than CPI would improve sustainability numbers while COLA assumption greater than CPI would diminish it (let me know if that makes sense--certainly can provide some numbers to demonstrate).