Determining Safe Withdrawal Rates for Post-Retirement via a Ruin-Theory Approach

To ensure a comfortable post-retirement life and the ability to cover living expenses, it is of utmost importance for individuals to have a clear understanding of how long their pre-retirement savings will last. In this research, we employ a ruin-theory approach to model the inflows and the outflows of retirees’ portfolios. We track all transactions within the portfolios of retired clients sourced by a registered investment provider to Canada’s Financial Wellness Lab at Western University. By utilizing an advanced ruin model, we calculate the mean and the median time it takes for savings to be exhausted, the probabilities of exhaustion of funds within the retirees’ expected remaining lifetime while accounting for the observed withdrawal rates, and the deficit at ruin if a retiree has used up all of their savings. We also account for gender as well as for the risk tolerance of retired clients using a K-Means clustering algorithm. This allows us to compare the financial outcomes for female and male retirees and to enhance some findings in the literature. In the final phase of our study, we compare the results obtained by our methodology to the 4% rule which is a widely used approach for post-retirement spending. Our results show that most retirees can withdraw safely more than they currently do (around 2.5%). A withdrawal rate of about 4.5% is proved to be safe, but it might not provide sufficient income for most retirees since it yields approximately CAD 20,000 per year for male retirees in the highest risk tolerance group who withdraw about 4.5% annually.