Does International Diversification Improve Safe Withdrawal Rates?

By Wade Pfau

March 4, 2014

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Safe withdrawal rate (SWR) studies have been based on a few asset classes and rarely incorporated international diversification. This is problematic, as an SWR depends on portfolio return and volatility, and broader diversification can extend the efficient frontier toward better retirement outcomes. To determine the benefits of international diversification, I looked at the relative performance of withdrawal rates in 20 developed-market countries.

My first study of retirement income investigated SWRs with domestic market data for a number of developed-market countries since 1900 using the Dimson, Marsh and Staunton global returns data provided by Morningstar. I asked whether prospective retirees should be comfortable basing retirement decisions on the impressive but perhaps anomalous numbers found in historical U.S. data. Indeed, over this historical time period and when compared to the other countries, the U.S. consistently enjoyed among the highest inflation-adjusted returns and lowest volatilities for stocks, bonds, bills and inflation.

What had been safe for U.S. retirees in the past was far less secure for our foreign counterparts.

Asset allocation does matter. As a refresher about international results, Table 1 shows historical outcomes for hypothetical retirees in each country, assuming they invested half of their assets in domestic stocks and half in domestic bonds. The results are sorted by SAFEMAX, the SWR for the worst-case scenario from history, and the table provides further details about outcomes using 4% and 5% withdrawal rates.

Of these countries, the U.S. was among the best performing.

Table 1
Sustainable Withdrawal Rates Around the World
With a Fixed Asset Allocation: 50% Domestic Stocks & 50% Domestic Bonds

Withdrawal Rate = 4%

Withdrawal Rate = 5%

SAFEMAX

SAFEMAX Year

10th Percentile

# Years in Worst Case

% Failures Within 30 Years

# Years in Worst Case

% Failures Within 30 Years

Denmark

3.68

1939

3.98

26

10.7%

19

57.1%

United
States

3.67

1966

4.02

24

8.3%

17

44.1%

Canada

3.66

1903

3.9

25

14.3%

16

44.1%

New
Zealand

3.6

1970

3.97

22

11.9%

15

46.4%

South
Africa

3.46

1937

4.05

24

7.1%

16

40.5%

Netherlands

3.24

1941

3.64

21

33.3%

16

57.1%

Sweden

3.23

1914

3.76

19

19.1%

13

54.8%

United
Kingdom

3.05

1900

3.35

19

23.8%

13

53.6%

Switzerland

2.92

1907

3.23

17

23.8%

12

48.8%

Australia

2.9

1970

3.56

16

17.9%

12

39.3%

Norway

2.72

1912

2.98

13

53.6%

9

67.9%

Ireland

2.6

1900

2.77

15

41.7%

11

65.5%

Spain

2.18

1973

2.61

10

50.0%

8

82.1%

Belgium

1.39

1911

1.65

8

56.0%

7

78.6%

Finland

1.34

1917

1.71

6

41.7%

5

53.6%

France

0.93

1943

1.62

7

61.9%

6

75.0%

Italy

0.9

1942

1.23

5

73.8%

4

79.8%

Germany

0.84

1911

0.96

3

54.8%

2

67.9%

Austria

0.26

1914

0.3

5

46.4%

5

61.9%

Japan

0.25

1937

0.29

3

35.7%

3

42.9%

Note: Assumptions include a 30-year retirement duration, no administrative fees, annual inflation adjustments for withdrawals and annual rebalancing.
Source: Own calculations from Dimson, Marsh and Staunton Global Returns Data (1900 – 2012)
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