RETIREMENT

INSIGHTS

Breaking the 4% rule

Dynamically adapting asset allocation and withdrawal rates
to make the most of retirement assets
FOREWORD Over the past decade, retirees have been forced to navigate the dual investment challenges of
extremely low interest rates and elevated market volatility. Many have relied on the popular
4% rule to draw down their portfolio assets, but this approach—developed in the very different
market climate of the 1990s—has increasingly been called into question in terms of providing a
truly sustainable retirement income stream. As a result, the rapidly growing number of investors
preparing to enter retirement may wish to reconsider their withdrawal options.

Our research suggests investors and their financial advisors should look beyond the static
rules of the past when seeking to achieve stronger results from their retirement income
withdrawal strategies. A portfolio-based solution using a more robust withdrawal rate
framework may help investors better address their retirement funding needs by embedding
market risk, longevity risk and evolving personal circumstances in a way that a cash-flow-
based approach simply cannot.

As we have evaluated various withdrawal strategies and have taken into account new criteria,
we have found that:

• Maximizing expected lifetime utility (i.e., potential derived satisfaction) serves as a more
effective benchmark of retirement withdrawal success than typical measures, such as
probability of failure. Focusing on utility offers a way to quantify how much satisfaction
retirees receive from their portfolio withdrawals. This can help potentially increase
investors’ level of income when they are most apt to enjoy their retirement dollars, while
still avoiding the risk of premature portfolio depletion.

• A dynamic approach to managing withdrawals and asset allocations provides a more

effective use of retirement assets than traditional approaches. Adapting to changes
in market conditions and investors’ specific situations over time can help maximize the
expected lifetime utility generated by retirement assets. This type of dynamic strategy may
help provide greater payout consistency and reduce the likelihood of either running out of
money or accumulating excess wealth that is unlikely to be used by the investor.

• Age, lifetime income and wealth all provide key insights into how to adjust investors’
withdrawal strategies throughout retirement. Holding all other factors constant, higher
initial wealth levels suggest individuals lower their withdrawal rates, while also increasing
their fixed income allocations. Greater lifetime income, through Social Security, pensions
and/or lifetime annuities, allows individuals to increase both their withdrawal rates and
equity allocations. Increasing age allows individuals to increase their withdrawal rates,
while also decreasing their equity exposure.

J.P. MORGAN ASSE T M A N AG E ME N T 1

 Based on this analysis, a dynamic withdrawal model may offer substantial advantages to help
investors make the most of their assets throughout their retirement years. For more information
about the J.P. Morgan Dynamic Retirement Income Withdrawal Strategy or any of the other
topics covered in this paper, please contact your J.P. Morgan Asset Management representative.

Sincerely,

Abdullah Z. Sheikh, FSA S. Katherine Roy, CFP Anne Lester

Research & Analytics Chief Retirement Strategist Senior Portfolio Manager
Asset Management Solutions J.P. Morgan Asset Management Asset Management Solutions
Global Multi-Asset Group Global Multi-Asset Group

2 B R EA K IN G T H E 4% RUL E
TABLE OF CONTENTS

5
Overview

7
Comparing different retirement income withdrawal strategies

9
Developing a dynamic decumulation model

14
Dynamic retirement income withdrawal applications

25
Conclusion

26
Appendix

J.P. MORGAN ASSE T M A N AG E ME N T 3

4 B R EA K IN G T H E 4% RUL E
OVERVIEW The numbers are staggering. Over the past 20 years, retirement planning
has largely been about how to maximize asset accumulation efforts to
ensure as many Americans as possible are ready to retire with sufficient
savings. Today, with 76 million baby boomers transitioning to retirement
and an average 10,000 people projected to reach age 65 per day over the
next 20 years,1 retirement income withdrawal strategies have now also
begun to receive much greater attention, as more investors re-examine
the best way to tap into their retirement nest eggs.

In an ideal world, one could simply match all future expenses in retirement with the
proceeds from a portfolio of assets derived from pre-retirement savings, thereby
safeguarding adequate income and removing the risk of funding shortfalls. This is
difficult to achieve in practice, however, for two main reasons:

1) Future expenses are unknown

Since no one knows how long they will live, it is not possible to forecast the exact
costs associated with living, traveling and receiving health care in retirement, an
issue further complicated by how variable these expenses can be over time.

2) Future assets are unknown

A portfolio of non-cash assets, such as equities or bonds, will fluctuate depending
on economic and market environments, making future account values unknown
at the outset.

The unpredictable nature of these two critical inputs highlights some of the
weaknesses in conventional approaches to retirement income planning. Indeed, there
is mounting evidence that the static withdrawal rules of thumb that may have worked
well enough in the past likely do not offer the most efficient usage of retirement
assets. The 4% rule in particular has faced increased scrutiny, prompted by the
current prolonged low interest rate environment and the negative impact fixed
withdrawals had on shrinking retirement account balances in the wake of the 2008
financial crisis.

Looking ahead, we believe investors may want to consider a dynamic approach to

retirement income withdrawals. Based on our research, periodically adjusting
withdrawal rates and portfolio asset allocations in response to changes in personal
wealth, age and lifetime income2 may offer greater probability of retirement income
funding success, not just in terms of the amount of dollars received but also with
retirees’ overall satisfaction with their withdrawals.

1
Pew Research Data; December 2010.
2
The term lifetime income refers to any income that is “guaranteed” and will last for life, such as Social
Security, pensions and/or lifetime annuities.

J.P. MORGAN ASSE T M A N AG E ME N T 5

In this paper, we examine:

• The pros and cons of different retirement income

withdrawal strategies
• How a dynamic withdrawal model can help enhance
investors’ retirement experience
• Case studies that illustrate real-world portfolio
applications and potential advantages of a dynamic
withdrawal framework

Our goal with this analysis is to help investors develop more

robust solutions to their post-retirement income and asset
allocation needs. Working with their financial advisors, retirees
can apply this framework and incorporate their unique
circumstances and risk profiles into a dynamic withdrawal
strategy specifically designed to secure their income needs
and better weather the constantly evolving nature of the
financial markets.

6 B R E A K IN G T H E 4% RUL E
Comparing different retirement income
withdrawal strategies
Evaluating various retirement income withdrawal approaches starts with defining the objectives of a successful post-
retirement decumulation strategy. Most would agree that the primary focus of a prudent withdrawal approach is
to maintain a careful balance between managing lifestyle risk and longevity risk, two critical, if at times conflicting,
goals. The key is to generate and withdraw enough from retirement savings to finance expenses at a level that
maintains a sustainable post-retirement living standard, while avoiding the uncertainty of running out of money.

It is also important to remember, however, that there is an
emotional value to retirement income, as well as a monetary one.
As such, we recommend adding a third goal to this list: maximiz-
ing how much utility value investors receive from their withdrawals.
This offers a more holistic perspective around the withdrawal
planning process to help capture the full potential of retirement
assets. For example, the risk of running short of money is easy
to grasp, but pulling out too little is also problematic, in our
opinion. Setting aside specific bequests and/or legacy aspirations,
an excess level of unused wealth at death may only represent
assets that could have been utilized to enhance the richness of
an individual’s retirement experience, perhaps significantly.
Hence, we believe the aim of a withdrawal strategy should be to
exhaust retirement assets in the most efficient manner possible,
while mitigating the risks of premature portfolio depletion.
In order to incorporate the concept of utility value into the
withdrawal process, we focus on a metric known as expected
lifetime utility, which quantifies the collective perceived
satisfaction of all withdrawals received in retirement. While
this measure can arguably be somewhat subjective, it draws
from well-established microeconomic principles that offer
important insights into the emotional aspects of investing.
A robust withdrawal framework also needs to take into account
a wide variety of personalized factors that may influence the
optimal income strategy. Specific individual investor charac-
teristics, such as age, wealth level, level of lifetime income
(e.g., Social Security, pensions or lifetime annuities), life
expectancy and risk preferences provide key inputs into
determining an appropriate asset allocation strategy and the
resulting withdrawal rate that can be realistically supported.
In addition, adequate decumulation sustainability requires
accounting for a broad range of market scenarios and planning
for as many future (and historical) trajectories of the financial
markets as possible, including severe downside scenarios such
as those experienced in the financial crises of 2008.
All of these considerations provide useful context to compare
different retirement income withdrawal strategies. Consider
the two most common approaches:
• The “4% rule” dictates that individuals withdraw 4% of their
initial portfolio value in the first year of retirement and
annually increase that amount by the inflation rate of the
preceding year to maintain purchasing power (alternatively,
inflation increases may be based on historical rates or long-
term averages). This approach focuses on withdrawals only
and does not recommend a particular asset allocation.
Dollar amounts are determined strictly by portfolio value,
without any additional consideration to individual retiree
characteristics around wealth, age or lifetime income.
• The required minimum distribution (RMD) approach is
based on the amounts that the U.S. government requires
retirees to withdraw from traditional Individual Retirement
Accounts and employer-sponsored retirement plans
beginning at age 70½. Annual withdrawals are determined
using the following equation:
Withdrawal amount = Portfolio value / Remaining life expectancy
The RMD approach also does not recommend a particular
asset allocation, nor does it account for retiree wealth or
lifetime income, though it does consider age.

J.P. MORGAN ASSE T M A N AG E ME N T 7

E XH IBIT 1: O VER VIEW OF VARIOU S RET IREMEN T IN C O M E W I THD R A W A L A P P R O A CHE S
Customized to
Strategy Primary benefit individual
4% rule Strives to preserve No
purchasing power
RMD Strives to avoid Age only
depleting portfolio
assets prematurely
J.P. Morgan Dynamic Strives to maximize Age, wealth, lifetime
Strategy expected lifetime utility income, risk profile
Source: J.P. Morgan Asset Management. For illustrative purposes only.
As shown in Exhibit 1, these common approaches have pros
and cons. The 4% rule is simple to understand and easy to
apply, but it has come under fire in the past several years
given that it does not hold up particularly well against
longevity risk in extremely volatile markets, especially when a
portfolio loses significant value during the early years of
retirement. The RMD methodology is better at ensuring that
retirees do not deplete assets early, since it incorporates life
expectancy into its basic formula. However, it can be unstable
in terms of minimizing lifestyle risk, since it directly translates
portfolio volatility into income volatility. For example, a 15%
asset decline automatically translates into a 15% RMD
spending cut, potentially difficult to manage on a fixed budget.
Given these shortcomings, J.P. Morgan began to explore how
investors might better satisfy their retirement income needs.
It seemed intuitive that a more dynamic approach to
withdrawal rate and asset allocation modeling could provide
the flexibility and customization necessary to minimize both
lifestyle risk and longevity risk, while extracting more potential
from a portfolio through a wider range of market cycles. The
result of this detailed research is a withdrawal framework that
is much more adaptive to the dynamic aspects of post-
retirement decision making and the uncertain nature of
PLACING UTILITY VALUE ON
RETIREMENT ASSETS
The fields of microeconomics and behavioral finance offer
practical insights into how investors tend to view and respond to
decisions about money and investing. Applying these principles
to a withdrawal strategy may help investors enjoy richer and
more fulfilled retirements by acknowledging the emotional
elements behind the retirement income planning process.
8 B R EA K IN G T H E 4% RUL E
Accounts for market
uncertainty Sets withdrawal rate Sets asset allocation
No Yes No
No Yes No
Yes Yes Yes
financial markets, including the risks of extreme events such
as the 2008 financial crisis.
• The J.P. Morgan Dynamic Retirement Income Withdrawal
Strategy offers withdrawal rate and asset allocation
suggestions, both of which are proactively tailored to retirees’
evolving circumstances and portfolio experiences on an
ongoing basis. For a given age, level of wealth and level of
lifetime income, our framework dynamically determines an
appropriate asset allocation and corresponding withdrawal
amount for the upcoming year. The resulting detailed output
is based on sophisticated portfolio modeling that has largely
been out of reach for most investors. (For a more detailed
description of this process, please refer to the Appendix.)
This highly personalized approach is also unique in the sense
that it has been specifically built around the concept of
maximizing expected lifetime utility. Incorporating individual
characteristics and preferences as key inputs offers a
disciplined yet dynamic withdrawal approach to help retirees
extract greater financial and personal value from their
portfolios. This process seeks to help compensate for the
magnitude of income shortfalls and extra spending that may
transpire throughout retirement, while reducing the risks of
both outliving assets and excess wealth accumulation. The
result is a retirement income planning approach designed to
help achieve broader investment success across the entire
retirement horizon.
Developing a dynamic decumulation model
To develop a cohesive withdrawal framework, we identified five key factors to address in our decumulation model.
Each of these variables can have significant impact on optimizing a post-retirement withdrawal solution. Following are
brief descriptions of each factor with the rationale for its inclusion.

Factor 1: Individual preferences for magnitude
and timing of withdrawals
In order to evaluate the satisfaction, or utility, a retiree receives
from a given withdrawal strategy, we rely on a utility-based
methodology to help measure and evaluate the emotional value
of each dollar paid out. We apply a utility function that can
model retiree preferences for both magnitude and timing of any
income received to help quantify this core input.
• Withdrawal magnitude: The utility function around
withdrawal amounts is concave (or “curving in,” as shown in
Exhibit 2) with respect to increases in retirement income. In
other words, retirees get less satisfaction from each
additional dollar of income withdrawn above a certain point.
This is consistent with human behavior, whereby the first
dollar of income received carries more marginal satisfaction
than each additional dollar.
• Withdrawal timing: The utility function around when a
retiree receives money includes a discount factor that
applies to each future withdrawal. This discount factor
increases as withdrawals take place in the future, as
illustrated in Exhibit 3. As a result, there is a time
preference for withdrawals made earlier in retirement. This
is also consistent with human behavior, whereby income
received earlier (e.g., today) is more attractive than income
received in the future (e.g., tomorrow). It is worth noting
that this time preference for earlier income is strictly
emotional in nature and distinct from the time value of
money, which instead accounts for the monetary
discounting of dollars (i.e., dollars received in the future
compared to their present purchasing power).
Factor 2: Levels of wealth and lifetime income
It seems logical that different levels of wealth and lifetime
income, such as Social Security, pensions and life annuities,
should generate different suggested asset allocations and
withdrawal rates in retirement. For example, retirees with higher
initial wealth levels have a greater ability to withstand negative
shocks, such as unanticipated medical, living or travel expenses
due to inflation or personal emergencies. Similarly, individuals
and couples with significant lifetime income have a lower risk of
poorer outcomes later in retirement than retirees with less
lifetime income, since this secured income baseline ensures at

E XH IB IT 2: MAR GINAL U T IL IT Y DEC REAS ES F OR EAC H E X HI BI T 3 : TI M E P R E F E R E NCE F O R E A R L I E R W I TH DR A WA LS,

A D D IT IO NAL DO L L AR OF IN C OME BA S E D O N U TI L I TY O F $1 0 0 S P E NT A T V A R I O U S AG ES
40 12

35
10
30
8
25
Present utility
Utility

20 6

15
4
10

5 2

0 0
$0 $10,000 $20,000 $30,000 $40,000 $50,000 65 70 75 80 85 90 95 100
Spending Age
Source: J.P. Morgan Asset Management and Essays in the Theory of Source: J.P. Morgan Asset Management. For illustrative purposes only.
Risk Bearing, Markham Publ. Co., Chicago, 1971.

J.P. MORGAN ASSE T M A N AG E ME N T 9

 least a minimum standard of living even in scenarios of high
longevity and/or poor financial market returns. Consequently, our
framework recognizes that downside risk is greater for those with
less initial wealth and lower or no lifetime income, relative to
those with greater wealth and higher levels of lifetime income.
Factor 3: Current age and life expectancy
Life expectancy at any given age measures the number of years,
on average, retirees can expect to live based on the mortality
experience of the U.S. population. Our model uses standard
Actuarial Life Tables from the U.S. Social Security Administration.3
Data is available for males and females, providing the opportunity
to derive the probability of survival for couples as well.4
To illustrate the concept of life expectancy, Exhibit 4 shows
the conditional probability of survival for males, females and
couples to various ages, assuming a current age of 65. In the
case of couples, there are two probabilities: at least one
spouse surviving to a given age and both spouses surviving to
a given age. As would be expected, a retiree’s probability of
survival decreases as age increases.
E XH IB IT 4 : SURVIVAL PROB AB I L IT Y F OR 6 5 -Y EAR-OLD M A L E S ,
FE M AL ES AND CO UPL ES T O DI F F EREN T AGES
100 Males
Females
Couples (one member)
80
Couples (both members)
Probability (%)
60
40
20
0
65 70 75 80 85 90 95 100 105
Age
Source: J.P. Morgan Asset Management and Social Security Administration.
For illustrative purposes only.
Our framework weighs the utility of withdrawals at a given age
by the probability of survival to that age to arrive at a survival
weighted utility of withdrawal. Thus, each period’s withdrawal
utility is discounted by the probability of being able to actually
obtain it. For example, a 65-year-old couple’s survival weighted
utility for $1 projected to be withdrawn at age 75 is higher than
10 B REA K IN G T H E 4% RUL E
the survival weighted utility of $1 projected to be withdrawn at
age 120. This is because there is a 97% chance that at least one
spouse will survive to age 75 but close to 0% odds that at least
one spouse will still be alive at age 120. Survival weighting
utility of withdrawals reduces the attractiveness of strategies
that defer income withdrawal to the end of an individuals’ or
couple’s lives, as the utility value of a dollar spent later is
significantly less than that of a dollar spent at a younger age,
simply because there are greater odds the later dollar will never
actually be used.
In some cases, mortality also affects lifetime income. For
example, in the case of Social Security or joint and survivor
annuities, benefits are often reduced on the death of a spouse.5
Our framework accounts for this reduction in lifetime income. In
such cases, the lower amount is somewhat offset by a higher
utility derived from a dollar of spending for an individual versus
a couple. That is, in order to compensate for the corresponding
lower expenses associated with one individual versus a couple,
we attribute a higher utility for the same dollar amount of
spending by an individual.6
Factor 4: Market randomness and
extreme events
lnvestors and financial advisors typically employ a scenario-
based approach when considering market uncertainty. A
scenario-based approach evaluates how different withdrawal
strategies might fare in a variety of economic and financial
market environments. This approach recognizes that a solution
that meets income goals across a wider range of possible
scenarios is more robust and preferable to one that meets
retirees’ needs in only a small, specific set of market conditions.
3
For further details, please see http://www.ssa.gov/oact/STATS/table4c6.html.
4
To calculate the probability of at least one spouse surviving to a given age,
use the formula P(A or B) = P(A) + P(B) – P(A and B). For ease of computation,
we assume A and B are independent so that P(A and B) = P(A) x P(B).
5
Our model assumes a one-third reduction in lifetime income upon the death
of a spouse, an approximation based on the current Social Security formula
rules applied to a couple with one working spouse. The exact reduction in
Social Security benefits will likely vary depending on the unique
circumstances of the couple.
6
To maintain parity in utility functions, we ensure the utility of $0.66 (two-
thirds of $1) spent by the surviving spouse is equal to the utility of $1 spent
by a couple. For further details, please refer to the exact specification of the
utility function in the Appendix.
To capture the future uncertainty associated with the financial
markets, our model applies a forward-looking simulation that
generates 10,000 random equity and bond returns.7 We use
J.P. Morgan 2014 Long-Term Capital Market Assumptions for
the purposes of calibrating expected performance, as shown
in Exhibit 5. The firm offers market assumptions that cover a
wide array of asset classes. Any number could be included in
the model output, but we focused on two asset classes with
very different risk/reward profiles to help simplify our
analysis, while still effectively illustrating how retirees might
adjust risk exposure.
E XH IB IT 5: J.P . MO R GAN 2 01 4 L ON G-T ERM C APIT AL M A R K E T
A SSUMPT IO NS
U.S. large U.S. aggregate
cap stocks bonds Inflation
Expected annual
compound return 7.50% 4.25% 2.25%
Expected volatility 14.75% 6.50% 1.50%
In order to account for the downside risk of extreme market
events, such as the 2008 financial crisis, our model applies
J.P. Morgan’s proprietary Non-Normal Framework.8 The key to
this framework is recognizing that many traditional financial
models are based on three incorrect assumptions around what
is generally assumed to be market normality:
• Traditional assumption #1: Returns are independent
from period to period. In reality, some asset class returns
exhibit marked serial correlation, frequently influenced by
prior periods.
• Traditional assumption #2: Asset returns are normally
distributed. In reality, asset returns are not normally
distributed, as can be empirically observed in a broad
range of past scenarios.
• Traditional assumption #3: Asset class relationships are
linear. In reality, asset class correlations show significant
breakdown in times of market stress.
Our Non-Normal Framework strives to correct these
shortcomings by using advanced statistical methods designed
to capture the long-term downside risk associated with market
anomalies. This offers an analysis that can model empirically
observed non-normality, taking into account more than just
one-standard-deviation events and better reflecting their
observed frequency. This revised set of assumptions and
statistical techniques is designed to help gain a better picture
of downside risk and provide a more realistic framework for
identifying and testing potential investment solutions.
Factor 5: Dynamic nature of the
decision-making process
Evolution of an individual’s wealth in retirement will depend
on actual realized expenses and the performance of portfolio
assets. As discussed earlier, although retirement expenses and
portfolio performance can be estimated, they cannot be
forecasted with any amount of detailed precision.
For example, it is possible to broadly estimate living, travel
and health care expenses, but each of these also closely
depend on unknown factors such as inflation, travel frequency
and destinations and general retiree well-being and related
health care needs. Similarly, portfolio performance will
depend on future economic and financial market performance,
which is completely unknowable in the present.
Luckily, individuals in retirement are not obliged to adopt a
static withdrawal approach but can, in fact, adapt their
withdrawal rates and asset allocations to changes in the market
climate and their personal financial situations. If one year’s
experience is better than expected (e.g., actual expenses are
lower and/or portfolio performance is better than anticipated),
an individual could conceivably increase the following year’s
withdrawal slightly to enjoy the surplus or decrease portfolio
equity risk and increase fixed income allocations to lock in the
gains for income later in retirement. Conversely, if one year’s
experience is worse than expected, an individual could decrease
the withdrawal the next year or increase portfolio equity
exposure to target higher expected returns and potentially
higher income in the future to make up for the shortfall.
Our framework easily allows for this dynamic nature of post-
retirement withdrawal planning. Retirees can change both their
asset allocations and withdrawal rates at the end of each year, in
response to their actual experience over the course of that year.
We believe this improves the efficiency of our post-retirement
income solution, compared with more static approaches.
7
We believe 10,000 simulations should reduce simulation error sufficiently
to draw robust inferences from the results.
8
For full details about this model, please see J.P. Morgan Asset Management’s
“Non-Normality of Market Returns: A Framework for Asset Allocation
Decision Making (2009).”
J.P. MORGAN ASSE T MA N AG E ME N T 11
Putting it all together: Framework
methodology
Our dynamic model effectively combines these five key factors
into a single cohesive framework. To achieve this, we apply
concepts from the field of dynamic programming, a body of work
that specifically deals with finding optimal solutions to multi-
period problems with several decision variables at each stage.
This process arrives at customized asset allocation and
withdrawal rate considerations through the complex,
integrated analysis of the retiree’s specific investment profile
and an incredibly broad spectrum of possible market
scenarios, as illustrated in Exhibit 6.
Critical inputs include:
• Functional form and parameter values of the utility
function used to describe retiree preferences
• Life expectancy for individuals and couples from
60 onwards
• Initial levels of wealth at retirement and lifetime
income levels
• 10,000 simulations accounting for non-normal financial
market returns for stocks, bonds and inflation
Our model then calculates optimal asset allocation and withdrawal
rate solutions at each age with the goal of maximizing expected
lifetime utility. This is achieved through a backward induction
process, beginning at age 120 and working toward age 60.9 The
end output of this process is a set of tables that detail an
optimized asset allocation and withdrawal strategy that changes
over time, seeking to maximize the investor’s expected lifetime
utility of retirement assets. In our opinion, this metric offers a
more meaningful, holistic success measure than typically applied
benchmarks, such as probability of failure, which focuses solely on
the risk of running out of money too soon.
E XH IB IT 6: J.P . MO R GAN DY N AMIC MODEL
KEY I N P U TS C ALCU L ATIO N
• Define utility function parameter values Solve for optimal asset Customized asset
to describe retiree preferences allocations and withdrawal
• Define life expectancy from 60 onwards rates at each age to maximize
• Set levels of retirement wealth and expected lifetime utility
lifetime income
• Generate 10,000 simulations accounting for
non-normal financial market returns
12 B REA K IN G T H E 4% RUL E
Expected lifetime utility: A better
quantifier of success
Measuring a withdrawal strategy’s effectiveness based on how
much satisfaction a retiree receives from his or her portfolio
assets represents a significant paradigm shift. This changes the
focus to evaluating the maximum potential utility value that can
be received each year, while also accounting for the probability
that a retiree will live long enough to actually obtain it.
In contrast, probability of failure calculates, for a given asset
allocation and withdrawal rate, the likelihood of early
depletion of retirement assets over a fixed or variable time
horizon, usually life expectancy. Although incorporating life
expectancy is an improvement from a fixed time horizon
calculation, a probability of failure metric still suffers from
two major drawbacks:
• First, it does not incorporate utility theory. Probability of
failure metrics do not allow for individual preferences for
either the magnitude or timing of income. Behavioral
studies have shown that individuals receive less
satisfaction from each additional dollar of income and
tend to exhibit a strong time preference for current over
deferred withdrawals. A probability of failure metric fails
to acknowledge these nuances and assumes a fixed
satisfaction from each withdrawal dollar throughout
retirement. Ignoring these behavioral tendencies may
potentially lead to unrealistic assumptions and solutions,
such as advocating constant real withdrawal strategies for
the duration of retirement.
9
In the final year of life, 120 based on our life tables, we assume the optimal
solution is for retirees to spend all of their remaining wealth (excluding any
bequest amounts). Other constraints and objective functions can also be
introduced, depending on the specifics of the individual. Please refer to the
Appendix for technical details of framework and algorithm.
DY NAMIC OU TP UT
=
allocation and withdrawal
rate considerations based on
age, wealth, lifetime income,
gender, marital status and
risk profile
• Second, it does not adequately allow for the risk of excess
wealth accumulation or any degree of potential shortfall ACCOUNTING FOR BEQUESTS AND LEGACIES
in retirement. Probability of failure metrics only consider The J.P. Morgan Dynamic Strategy can be customized to
downside risks in a binary fashion, the consequence of accommodate retirees’ specific bequest and legacy aspirations.
Because this model strives to exhaust retirement assets in the
which may be advocating strategies that are overly
most efficient manner possible, retirees simply must segment
conservative, either with low withdrawal rates and/or fixed whatever dollar amount they hope to leave behind away from
income heavy portfolios. This may risk unnecessarily their withdrawal portfolios. This ensures an adequate amount
reducing retirees’ standard of living, as well as resulting in will be reserved to fulfill their wishes rather than hoping
a potential accumulation of assets later in retirement for enough assets are left in their estates to meet these needs.
which investors ultimately have little need or use.
THE IMPORTANCE OF PLANNING FOR
A utility-based metric eliminates these problems. To be fair,
EXTREME MARKET EVENTS
even this preferred approach has drawbacks. For example, the
choice of utility function is not easy or clear cut, and even The concept of investment fat-tail risk refers to the relatively
smaller probability of experiencing extreme performance
then there is debate around the proper choice of parameter outcomes that may occur less frequently but remain well within
values to be used in calibration. The concept of utility also the realm of possibility. The challenge is that these severe
cannot be measured directly but rather relies on drawing events are completely random and may happen far more often
inferences from human behavior. Accordingly, there is still than most people are willing to contemplate. Just ask retirees
unlucky enough to suffer recently through two devastating
considerable subjectivity in measuring and evaluating the
bear markets and a decade of flat equity returns.
utility of different withdrawal strategies. However, while this
measure is by no means perfect, we believe it incorporates
much more realistic assumptions about human preferences
and retirement dynamics than traditional metrics. These
insights provide significant advantages in developing a
withdrawal model better structured to meet the real-world
needs of retirees.

J.P. MORGAN ASSE T MA N AG E ME N T 13

Dynamic retirement income
withdrawal applications
Our main recommendation to retirees through this research is to
be dynamic in their post-retirement financial planning, adapting
their asset allocations and withdrawal rates to their evolving
circumstances and portfolio experiences. To this end, we analyzed
how a dynamic withdrawal strategy may broadly apply to changes
in three core investor characteristics:10
Age Lifetime income Wealth level
income, the suggested withdrawal rate jumps to 7.7% per year,
while the suggested bond allocation increases to 24%.
BOTTOM LINE: Increasing age allows retirees to increase
their withdrawal rates and decrease their equity allocations.
E X HI BI T 7 : U TI L I TY - BA S E D W I THD R A W A L R A TE S A N D
A L L O CA TI O NS A CR O S S A G E (HO L D I NG L I F E TI M E I N C OME A T
$5 0 , 0 0 0 A ND W E A L TH A T $1 M I L L I O N CO NS TA NT)

24 Withdrawal rate (LHS) Bond allocation (RHS)

To aid in this understanding, we first analyzed our model’s 37
output based on changes to each individual factor, holding all
other factors constant (see Exhibit 11 for a summary). Portfolio 19 32
Withdrawal rate (%)

Bond allocation (%)

suggestions were based on equity and bond allocations.
27
14
1. Impact of aging 22
As individuals get older, life expectancy decreases based on 9
standard mortality table calculations, albeit in a non-linear 17

fashion due to survivorship bias.11 Lower life expectancy also

4 12
implies a shorter investment horizon for the portfolio. This 60 65 70 75 80 85 90 95 100
suggests that, if the goal is to utilize retirement savings more Age

fully, the effects of increasing age with regards to withdrawal

Retiree Suggested Suggested
rates and asset allocations should be as follows: age withdrawal rate bond allocation
65 5.9% 17%
• For a given level of wealth and lifetime income, older
70 6.7% 21%
retirees may have a higher withdrawal rate recommendation
75 7.7% 24%
than younger retirees, as there is less time remaining to
spend retirement savings. 80 9.2% 28%
85 11.3% 31%
• Older retirees should be more conservative in their asset 90 14.1% 34%
allocations, with higher allocations to fixed income, as there
95 17.5% 36%
is less time to recoup any potential portfolio losses to finance
future withdrawals. Source: J.P. Morgan Asset Management. For illustrative purposes only.

Exhibit 7 shows how our dynamic framework details this precise 10

relationship between aging, withdrawal rates and asset alloca-
tions. In this example, the suggested first year withdrawal rate
for a 65-year-old couple with $1 million in retirement savings
and $50,000 in lifetime income is 5.9%, with a suggested 17%
total portfolio bond allocation. For a 75-year-old couple also
with $1 million in retirement savings and $50,000 in lifetime
The optimal withdrawal rate and asset allocation is also a function of class
of utility function and the choice of parameters.
11
For every year that an individual ages, life expectancy decreases by less than
a year. So while 65-year-old males have a life expectancy of 17.5 years,
66-year-old males have a life expectancy of 16.8 years, greater than what is
obtained by subtracting one from the life expectancy of the 65-year-old
males. This is because survivors are generally healthier than those that did
not survive in the previous year, and thus the life expectancy of these survivors
is based on a generally healthier population.

14 B REA K IN G T H E 4% RUL E
2. Impact of lifetime income E X HI BI T 8 : U TI L I TY - BA S E D W I THD R A W A L R A TE S A N D
A L L O CA TI O NS A CR O S S L I F E TI M E I NCO M E L E V E L S (H OLDI N G
As discussed earlier, retirees with little or no lifetime income A G E A T 65 A ND W E A L TH A T $1 M I L L I O N CO NS TA N T )
have a greater risk of poorer outcomes later in retirement than 6.5 Withdrawal rate (LHS) Bond allocation (RHS) 60
retirees with higher levels of lifetime income. This suggests that
the effects of increasing lifetime income levels with regards to 6.0
50

withdrawal rates and asset allocations should be as follows:

Withdrawal rate (%)

Bond allocation (%)

40
5.5
• For a given age and wealth level, withdrawal rates at higher
30
lifetime income levels should be greater than at lower
5.0
lifetime income levels. This is because the higher secured 20
income floor reduces the likelihood of extremely poor 4.5
10
outcomes in retirement due to excessive withdrawals.
4.0 0
• Retirees with greater levels of lifetime income should be $0 $10 $20 $30 $40 $50 $60 $70 $80
more aggressive in their asset allocation, with larger equity Lifetime income (thousands)

allocations, as a higher proportional part of their overall

Lifetime income per year Suggested Suggested
retirement income stream is protected from any negative (in U.S. dollars) withdrawal rate bond allocation
ramifications from potential negative equity returns. $10,000 5.3% 46%

Exhibit 8 shows how our dynamic framework quantifies the
precise relationship between lifetime income levels, withdrawal
rates and asset allocations. In this example, the suggested first
year withdrawal rate for a 65-year-old couple with $1 million in
retirement savings and $20,000 in lifetime income is 5.5%, with
a suggested 38% total portfolio bond allocation. For a 65-year-
old couple with $1 million in retirement savings and $40,000 in
lifetime income, the suggested withdrawal rate jumps to 5.8%
per year, while the suggested bond allocation decreases to 24%.
BOTTOM LINE: Greater lifetime income, from sources such as
Social Security, pensions or lifetime annuities, allows retirees
to increase both their withdrawal rates and equity allocations.
3. Impact of wealth
There are two main drivers to consider in terms of the impact
different wealth levels may have on the retirement withdrawal
planning process. First, higher retirement wealth levels
require a smaller proportion of withdrawals to be spent on
basic necessities, such as food, shelter and health care,
allowing potentially more to be spent on non-essentials, such
as travel and entertainment. Second, utility theory suggests
asymmetric attitudes of individuals with regards to gains and
losses. In a retirement context, reducing withdrawals by a
certain dollar amount carries more emotional distress than
the pleasure obtained from increases of a similar amount. This
effect is more pronounced for wealthy retirees, as a specific
$20,000 5.5% 38%
$30,000 5.7% 30%
$40,000 5.8% 24%
$50,000 5.9% 17%
$60,000 6.0% 12%
Source: J.P. Morgan Asset Management. For illustrative purposes only.
percentage decline in wealth, due for example to poor equity
performance, leads to a larger dollar and utility reduction
compared to less wealthy retirees.
Keep in mind that this concept is distinct from wealthier retirees’
financial ability to weather volatility, at least in terms of securing
minimum baseline levels of living essentials (e.g., market losses
are unlikely to result in wealthier retirees going hungry, but it
may prompt more at-home dinners than eating out at fancier
restaurants). Instead, it focuses on the greater emotional distress
of experiencing larger dollar losses. This suggests that the effects
of increasing wealth levels with regards to withdrawal rates and
asset allocations should be as follows:
• For a given age and level of lifetime income, withdrawal
rates at higher wealth levels should be less than at lower
wealth levels. This is because the actual dollar amount
withdrawn is substantially higher and the satisfaction
derived from greater withdrawals does not increase

J.P. MORGAN ASSE T MA N AG E ME N T 15

 proportionally once a reasonable lifestyle level has been
achieved. Utility theory suggests that beyond that point
reducing withdrawals by a certain dollar amount carries
more distress than the pleasure obtained from increases
of a similar amount. This effect is more pronounced for
wealthy retirees, as a specific percentage decline leads to
a larger dollar and utility reduction compared to less
wealthy retirees.
• Wealthier retirees should be more conservative in their
asset allocations, with larger fixed income allocations.
Poor portfolio returns carry greater pain than commensurate
upside performance, and the same percentage decline
will result in a higher dollar loss for a larger portfolio
compared to a smaller portfolio.
Exhibit 9 shows how our dynamic framework captures the
precise relationship between retirement wealth, withdrawal
rates and asset allocations. In this example, the suggested first
year withdrawal rate for a 65-year-old couple with $1 million in
retirement savings and $50,000 in lifetime income is 5.9%, with
a suggested 17% total portfolio bond allocation. For a 65-year-
old couple with $2.5 million in retirement savings and $50,000
in lifetime income, the suggested withdrawal rate falls to 5.5%,
while the suggested bond allocation increases to 38%.
BOTTOM LINE: Higher initial wealth suggests retirees
lower their withdrawal rates and increase their fixed
income allocations.

E XH IB IT 9 : UT IL IT Y -B AS ED W I T H DRAW AL RAT ES AN D E X HI BI T 1 0 : S U M M A R Y O F HO W I ND I V I D U A L F A CT OR S MA Y
A LLO CATIO NS ACRO S S W EAL T H L EVEL S ( H OL DI N G AG E A T 6 5 A F F E CT W I THD R A W A L S A ND A S S E T A L L O CA TI O NS
A ND L IFETIME INC O M E AT $ 5 0,000 C ON S T AN T )
6.5 Withdrawal rate (LHS) Bond allocation (RHS) 40 Factor Withdrawal rate Equity exposure

35 Increasing age
6.0
30 Higher lifetime income
Withdrawal rate (%)

Bond allocation (%)

25
5.5 Higher initial wealth level
20
5.0 15

10
4.5
5

4.0 0 EQUITY ALLOCATIONS AND RISK PROFILE

$500 $700 $900 $1,100 $1,300 $1,500 $1,700 $1,900 $2,100 $2,300 $2,500 SUITABILITY
Wealth levels (thousands)
The J.P. Morgan Dynamic Model solves for a suggested
Wealth level Suggested Suggested asset allocation factoring in lifetime income as a bond-like
(in U.S. dollars) withdrawal rate bond allocation investment. Additionally, the equity allocation is reflective of
$500,000 6.1% 0% the risk capacity individuals have based on their mortality at
various ages. For example, at age 65 a male has a 78% chance
$1 million 5.9% 17%
of living 10 more years, whereas at age 90 the probability
$1.5 million 5.7% 28% is 5% for living 10 more years. As a result, the model may
$2 million 5.6% 34% recommend a higher allocation to equities than may be more
commonly applied when making a recommendation for
$2.5 million 5.5% 38%
investable wealth alone based on a client’s risk profile.
Source: J.P. Morgan Asset Management. For illustrative purposes only.

16 B REA K IN G T H E 4% RUL E
Multidimensional aspects of a
dynamic withdrawal strategy
Although an analysis of each of these individual factors
provides useful background, in practice age, wealth and
lifetime income are likely to evolve concurrently throughout
retirement. Hence, it is important to understand how our
model adapts withdrawal rates and asset allocations when
more than one factor changes at the same time, since this is
how individuals typically experience retirement.
Exhibit 11 offers specific examples of the J.P. Morgan
Retirement Income Withdrawal Tables generated by our
dynamic framework. These provide actual suggested
allocations and withdrawal rates for different combinations of
age, wealth and lifetime income. To illustrate how these tables
function, consider three hypothetical situations and the
optimal withdrawal and asset allocation suggestions implied
by our framework for each:
• Case study 1: 65-year-old couple with $1 million in
retirement savings and $50,000 in lifetime income.
Our suggested withdrawal rate is 5.9% for the next year,
with a suggested bond allocation of 17% and the
remaining 83% invested in equities.
• Case study 2: 60-year-old couple with $2.5 million in
retirement savings and $20,000 in lifetime income.
Our suggested withdrawal rate is 4.8% for the next year,
with a suggested bond allocation of 47% and the
remaining 53% invested in equities.
• Case study 3: 80-year-old single female with $500,000
in retirement savings and $20,000 in lifetime income.
Our suggested withdrawal rate is 9.1% for the next year,
with a suggested bond allocation of 28% and the
remaining 72% invested in equities.

E XH IB IT 11: SAMPL E J. P. MORGAN DY N AMIC RET I REM E NT I NCO M E W I THD R A W A L TA BL E S

Couples (same age)—$20,000 lifetime income

Optimal withdrawal rate Optimal bond allocation
Age Portfolio Value % Age Portfolio Value %
$500,000 $1,000,000 $1,500,000 $2,000,000 $$2,500,000 $500,000 $1,000,000 $1,500,000 $2,000,000 $$2,500,000
60 5.3 5.0 4.9 4.8 4.8 60 21 36 42 45 47
65 5.8 5.5 5.4 5.3 5.3 65 24 38 43 46 47
70 6.6 6.2 6.1 6.0 5.9 70 27 39 44 46 48
75 7.6 7.2 7.0 6.9 6.8 75 29 41 45 47 49
80 9.0 8.5 8.3 8.2 8.1 80 32 42 46 48 49
85 11.0 10.4 10.1 10.0 9.8 85 35 44 47 49 50
90 13.7 12.9 12.6 12.4 12.2 90 37 45 48 50 51
95 17.1 16.1 15.6 15.4 15.2 95 39 46 49 50 51

Couples (same age)—$50,000 lifetime income

Optimal withdrawal rate Optimal bond allocation
Age Portfolio Value % Age Portfolio Value %
$500,000 $1,000,000 $1,500,000 $2,000,000 $$2,500,000 $500,000 $1,000,000 $1,500,000 $2,000,000 $$2,500,000
60 5.4 5.3 5.2 5.1 5.0 60 0 14 26 32 36
65 6.1 5.9 5.7 5.6 5.5 65 0 17 28 34 38
70 6.9 6.7 6.5 6.3 6.2 70 0 21 31 36 39
75 8.1 7.7 7.5 7.3 7.2 75 2 24 33 38 41
80 9.8 9.2 8.9 8.7 8.5 80 8 28 35 40 42
85 12.2 11.3 10.8 10.6 10.4 85 13 31 38 41 44
90 15.3 14.1 13.5 13.1 12.9 90 19 34 40 43 45
95 19.2 17.5 16.8 16.4 16.1 95 23 36 42 44 46
Source: J.P. Morgan Asset Management. For illustrative purposes only.

J.P. MORGAN ASSE T MA N AG E ME N T 17

Males—$20,000 lifetime income
Optimal withdrawal rate Optimal bond allocation
Age Portfolio Value % Age Portfolio Value %
$500,000 $1,000,000 $1,500,000 $2,000,000 $$2,500,000 $500,000 $1,000,000 $1,500,000 $2,000,000 $$2,500,000
60 5.8 5.3 5.1 5.0 4.9 60 19 35 41 44 46
65 6.4 5.9 5.7 5.6 5.5 65 21 36 42 45 46
70 7.3 6.7 6.4 6.3 6.2 70 24 37 43 45 47
75 8.4 7.7 7.4 7.2 7.1 75 26 39 44 46 48
80 10.1 9.2 8.8 8.6 8.4 80 29 40 44 47 48
85 12.3 11.2 10.7 10.4 10.3 85 32 42 45 48 49
90 15.3 13.9 13.3 13.0 12.8 90 34 43 46 48 49
95 18.9 17.2 16.5 16.1 15.8 95 36 44 47 49 50

Males—$50,000 lifetime income

Optimal withdrawal rate Optimal bond allocation
Age Portfolio Value % Age Portfolio Value %
$500,000 $1,000,000 $1,500,000 $2,000,000 $$2,500,000 $500,000 $1,000,000 $1,500,000 $2,000,000 $$2,500,000
60 6.4 5.9 5.6 5.5 5.3 60 0 12 24 30 35
65 7.2 6.6 6.3 6.1 5.9 65 0 15 26 32 36
70 8.3 7.5 7.1 6.9 6.7 70 0 18 28 34 37
75 9.8 8.7 8.2 7.9 7.7 75 0 21 30 36 39
80 11.8 10.4 9.8 9.4 9.2 80 3 24 33 37 40
85 14.6 12.7 11.9 11.5 11.2 85 8 27 35 39 42
90 18.2 15.9 14.8 14.2 13.9 90 13 30 37 40 43
95 22.5 19.6 18.3 17.6 17.2 95 17 32 38 42 44

Females—$20,000 lifetime income

Optimal withdrawal rate Optimal bond allocation
Age Portfolio Value % Age Portfolio Value %
$500,000 $1,000,000 $1,500,000 $2,000,000 $$2,500,000 $500,000 $1,000,000 $1,500,000 $2,000,000 $$2,500,000
60 5.4 5.0 4.8 4.7 4.7 60 18 34 40 43 46
65 5.9 5.5 5.3 5.2 5.1 65 20 35 41 44 46
70 6.7 6.2 5.9 5.8 5.7 70 22 37 42 45 47
75 7.7 7.1 6.8 6.6 6.5 75 25 38 43 46 47
80 9.1 8.3 8.0 7.8 7.7 80 28 39 44 46 48
85 11.0 10.0 9.6 9.4 9.2 85 30 41 45 47 49
90 13.6 12.4 11.8 11.6 11.4 90 33 42 46 48 49
95 16.8 15.3 14.7 14.3 14.1 95 35 44 47 49 50

Females—$50,000 lifetime income

Optimal withdrawal rate Optimal bond allocation
Age Portfolio Value % Age Portfolio Value %
$500,000 $1,000,000 $1,500,000 $2,000,000 $$2,500,000 $500,000 $1,000,000 $1,500,000 $2,000,000 $$2,500,000
60 5.8 5.5 5.3 5.1 5.0 60 0 11 23 30 34
65 6.6 6.1 5.8 5.6 5.5 65 0 13 25 31 35
70 7.5 6.9 6.5 6.3 6.2 70 0 16 27 33 37
75 8.8 8.0 7.5 7.2 7.1 75 0 19 29 35 38
80 10.6 9.4 8.8 8.5 8.3 80 0 22 31 36 39
85 13.0 11.4 10.7 10.3 10.0 85 5 25 34 38 41
90 16.2 14.1 13.2 12.7 12.4 90 10 28 36 40 42
95 20.1 17.5 16.4 15.7 15.3 95 14 31 38 41 44
Source: J.P. Morgan Asset Management. For illustrative purposes only.

18 B REA K IN G T H E 4% RUL E
Stronger projected withdrawal
outcomes
Next, we wanted to evaluate how our framework might stand
up to the rigors of real-world retirement funding. We com-
pared the customized considerations of the J.P. Morgan
Dynamic Strategy to the static output of the 4% rule and RMD
model, assuming a fixed 60% equity/40% bond allocation
across retirement for the latter two approaches.
We applied these three withdrawal strategies to the previous
three case studies, running each hypothetical investor
example through 250,000 simulations across the entire
retirement horizon until death. For each simulation, the
market return each year drew from the 10,000 possible
equity, bond and inflation scenarios used in our optimization
process, covering the gamut from strong rising periods to
severe declines. Each withdrawal strategy was assessed in two
ways. First, we analyzed the distribution of portfolio values
over time to understand how successful the withdrawal
approach was in addressing key risks in retirement. Second,
we numerically evaluated how effective each strategy was at
maximizing retirement income for risk-averse investors.
TAX CONSIDERATIONS
Our model is focused strictly on optimizing withdrawal rates
and asset allocations in retirement. It does not take into
account any applicable taxes, due to the highly variable nature
of different tax situations.
ONGOING ANNUAL TABLE UPDATES
These tables may change in any given year, as new research
around retirement income withdrawals emerges and J.P.
Morgan Long-Term Capital Market Assumptions and the U.S.
Social Security Administration’s Actuarial Life Tables evolve.
ADAPTING TO SPECIFIC RISK PROFILES
Our model output can also be adjusted to accommodate
different risk profiles. Sample tables for investors comfor-
table with either greater or less market risk can be found
in the Appendix.

Our first test applied a straightforward measure: Does the

strategy provide a steady stream of income while effectively
avoiding both premature depletion of portfolio assets and
excess wealth accumulation? The results of our analysis are
illustrated in Exhibits 12 and 13, which respectively show the
distribution of potential withdrawals and corresponding
remaining portfolio values from ages 65 to 105 for each of the
three withdrawal strategies.

ABOUT THE BOX-AND-WHISKER CHARTS Percentile

5%
Values are presented in a box-and-whisker chart format, with the box marking the range of the 25th, 50th (median)
and 75th percentile outcomes, from top (best) to bottom (worst). The whiskers reaching out from the top and bottom 25%
of the box show the range of the distribution of outcomes up to the 5th and down to the 95th percentiles. As the
50%
dispersion of consumption streams and values increases, the box-and-whiskers become more elongated, indicating a
wider range of possible outcomes and, by extension, greater income and portfolio uncertainty. 75%

95%

J.P. MORGAN ASSE T MA N AG E ME N T 19

 E XHIBI T 12: PER CENT ILE OU T C OM E S FOR W IT HD RAW AL S O V ER T I M E: 6 5 - Y EA R - O L D C O U P L E WI T H $1 M I L L I O N I N R ET I R E M E NT
S AV INGS AND $50,000 IN LIFE T IM E INC OM E .

Real consumption stream ranges using the 4% rule ▲Steady income and
$240,000 consumption stream
▼Risk of excess wealth and
premature asset depletion
$190,000
Real consumption

$140,000

$90,000
$50,000
lifetime
income
$40,000
65 66 67 68 69 70 71 72 73 74 75 76 77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 100 101 102 103 104 105
Age

Real consumption stream ranges using the RMD approach

▲Low risk of excess wealth
$240,000 accumulation and asset depletion

▼High variability of income

$190,000
Real consumption

$140,000

$90,000
$50,000
lifetime
income
$40,000
65 66 67 68 69 70 71 72 73 74 75 76 77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 100 101 102 103 104 105
Age

Real consumption stream ranges using the J.P. Morgan Dynamic Strategy
▲Low risk of excess wealth accumulation
$240,000 and asset depletion
▲Variable consumption stream with higher
potential payouts earlier in retirement
$190,000
Real consumption

$140,000

$90,000
$50,000
lifetime
income
$40,000
65 66 67 68 69 70 71 72 73 74 75 76 77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 100 101 102 103 104 105
Age

Source: J.P. Morgan Asset Management. For illustrative purposes only.

20 B R EA K IN G T H E 4% RUL E
E XHIBI T 13: PER CENT ILE OU T C OM E S FOR RE AL PORT F O L I O V A L U E O V ER T I M E

Portfolio value ranges using the 4% approach

$2,000,000
$1,800,000
$1,600,000
$1,400,000
Portfolio value

$1,200,000
$1,000,000
$800,000
$600,000
$400,000
$200,000
$0
65 66 67 68 69 70 71 72 73 74 75 76 77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 100 101 102 103 104 105
Age

Portfolio value ranges using the RMD approach

$2,000,000
$1,800,000
$1,600,000
$1,400,000
Portfolio value

$1,200,000
$1,000,000
$800,000
$600,000
$400,000
$200,000
$0
65 66 67 68 69 70 71 72 73 74 75 76 77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 100 101 102 103 104 105
Age

Portfolio value ranges using the J.P. Morgan Dynamic Strategy

$2,000,000
$1,800,000
$1,600,000
$1,400,000
Portfolio value

$1,200,000
$1,000,000
$800,000
$600,000
$400,000
$200,000
$0
65 66 67 68 69 70 71 72 73 74 75 76 77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 100 101 102 103 104 105
Age

Source: J.P. Morgan Asset Management. For illustrative purposes only.

J.P. MORGAN ASSE T MA N AG E ME N T 21

Our key findings are: • The J.P. Morgan Dynamic Strategy was also much more
effective at managing the risk of excess wealth
• The 4% rule generally provided a steady stream of
accumulation and premature depletion of portfolio assets
income in real dollar terms during the early years of
compared to the 4% rule. Although payouts were more
retirement, but this stability began to break down around
variable than the 4% rule, they were more consistent
age 92, due to skewing factors such as survivorship bias
than the RMD approach. This is because, unlike the RMD
calculated by the model. Indeed, the probability range of
model, the J.P. Morgan Dynamic Strategy actively adapts
potential consumption streams became surprisingly wide
asset allocation and incorporates risk aversion through a
in later years, though the median payout remained
utility function, both of which serve to smooth payouts
relatively stable. The real issue with this approach,
due to fluctuations in portfolio value over time. In
however, became apparent with the range of potential
addition, consumption streams received a significant
portfolio values. There were significant risks of excess
boost in the earlier years of retirement, offering the
wealth accumulation in the median case and likelihood of
potential for greater payouts when retirees were most
premature depletion of assets in worse-case scenarios. In
likely to be able to enjoy them.
fact, in 5 percent of the scenarios in the case of a couple,
retirees could exhaust assets by age 92, an unacceptably All in all, the J.P. Morgan Dynamic Strategy offered the most
high probability as there is a significant chance that at balanced withdrawal solution. This model provided
least one spouse will survive to that age. significantly less risk of both prematurely running out of
money and leaving too much wealth untapped compared to
• The RMD approach was much more effective at managing
the 4% rule. It also offered a more reliable stream of
payouts than the 4% rule, reducing the likelihood of
retirement income compared to the RMD approach, an
excess wealth accumulation or premature depletion of
important consideration for retirees dependent on a steady
portfolio assets. This was because it incorporates portfolio
payout. These findings are summarized in Exhibit 14 and were
experience and longevity, increasing payouts with age and
consistent across all three case studies.
increasing wealth. However, similar to the 4% rule, the
RMD withdrawal rate is based largely on portfolio value,
which can be volatile depending on actual experience.
This risk can be seen in the spread between the top and
bottom percentiles in the chart, which is higher than the
J.P. Morgan Dynamic Strategy.

E XH IB IT 14 : KEY FIND I N GS

Strategy Risks Benefits

Variability of income Excess wealth accumulation Premature asset depletion Consumption stream
4% rule ▲Steady ▼Significant risk ▼Significant risk ▲Steady
RMD approach ▼High ▲Low risk ▲Low risk ▲Variable, but generally
higher than 4% rule
J.P. Morgan Dynamic Strategy ▲Lower than RMD; ▲Low risk ▲Low risk ▲Variable, but with odds of
higher than 4% rule higher payouts earlier in
retirement than RMD

Source: J.P. Morgan Asset Management. For illustrative purposes only.

22 B R EA K IN G T H E 4% RUL E
Evaluating withdrawal strategies E X HI BI T 1 5 : A S S E S S M E NT O F CE R TA I NTY E Q U I V ALEN T S
U ND E R D I F F E R E NT W I THD R A W A L S TR A TE G I E S
for risk-averse investors
Case study 1: 65-year-old couple with $1 million in
The second part of our analysis evaluated how effective each retirement savings and $50,000 in lifetime income
withdrawal strategy was at maximizing retirement income for $110,000 $108,233
risk-averse investors. To quantify this, we applied the concept $105,930
of certainty equivalents. $105,000

Certainty equivalent
Certainty equivalents measure how much lifetime real income $100,000
individuals would accept in lieu of trading all of their
retirement assets and following a particular strategy, such as $95,000 $93,719

the 4% rule. The lower the amount, the less attractive the
$90,000
particular strategy is to the individual, because the person
would accept a smaller lifetime income stream instead of $85,000
following the strategy. In our analysis, certainty equivalent 4% rule RMD approach J.P. Morgan
Dynamic Strategy
accounts for the risk-averse nature of retirees through our
choice of utility function, as well as for the likelihood of
various financial market and life expectancy scenarios. This
helps us compare different withdrawal strategies using a Case study 2: 60-year-old couple with $2.5 million in
common risk metric. (Details of the mathematical calculation retirement savings and $20,000 in lifetime income
for these certainty equivalents can be found in the Appendix.) $160,000
$136,612
$140,000
Exhibit 15 presents our certainty equivalent findings for the three $122,409
$120,000
case studies. In these examples, a higher certainty equivalent
Certainty equivalent

$100,000
represents a more attractive withdrawal approach since the
$80,000 $72,557
retirees demand higher guarantees to forsake that strategy.
$60,000

$40,000
Our key findings are:
$20,000
• For case study 1 with the 65-year-old couple with $1 million 0
in retirement savings and $50,000 in lifetime income, the 4% rule RMD approach J.P. Morgan
Dynamic Strategy
certainty equivalent for the J.P. Morgan Dynamic Strategy is
15% higher than the 4% rule and 2% higher than the RMD
approach. In other words, this retired couple would require
approximately $14,514 and $2,303 in additional lifetime Case study 3: 80-year-old single female with $500,000 in
income each year for the duration of their life in lieu of retirement savings and $20,000 in lifetime income
$60,000
following the J.P. Morgan Dynamic Strategy, compared to the $54,032 $55,080

4% rule and RMD strategy, respectively. $50,000

$39,982
Certainty equivalent

• For case study 2 with the 60-year-old couple with $2.5 $40,000
million in retirement savings and $20,000 in lifetime
$30,000
income, the certainty equivalent for the J.P. Morgan
Dynamic Strategy is 88% higher than the 4% rule and 12% $20,000

higher than the RMD approach. This couple would require

$10,000
approximately $64,055 and $14,203 additional lifetime
income each year for the duration of their life in lieu of 0
4% rule RMD approach J.P. Morgan
following the J.P. Morgan Dynamic Strategy, compared to Dynamic Strategy

the 4% rule and RMD strategy, respectively.

Source: J.P. Morgan Asset Management. For illustrative purposes only.

J.P. MORGAN ASSE T MA N AG E ME N T 23

• For case study 3 with the 80-year-old single female with
$500,000 in retirement savings and $20,000 in lifetime
income, the certainty equivalent for the J.P. Morgan
Dynamic Strategy is 38% higher than the 4% rule and 2%
higher than the RMD approach. This investor would require
approximately $15,098 and $1,048 additional lifetime
income each year for the duration of her life in lieu of
following the J.P. Morgan Dynamic Strategy, compared to
the 4% rule and RMD strategy, respectively.

The certainty equivalent advantages of the J.P. Morgan

Dynamic Strategy are summarized in Exhibit 16. In our
opinion, these numbers are significant, particularly in dollar
terms, considering the levels of wealth being reviewed.

E XH IB IT 16: C ER T AIN T Y EQU I VAL EN T IMPROVEMEN T U S I NG

J .P. MO R GAN DY NAMIC S T RAT EGY C OMPARED T O OT H E R
WITHDR AW AL STR ATEGI ES

Investor profile Improvement compared to:

4% rule RMD approach
Case study 1 15% higher 2% higher
Case study 2 88% higher 12% higher
Case study 3 38% higher 2% higher

24 B R EA K IN G T H E 4% RUL E
CONCLUSION Based on our findings, a dynamic approach to setting withdrawal rates and asset allocations in
retirement appears preferable to the static, more simplistic methods typically used by investors.
The commonly applied 4% rule and RMD approach fail to address many of the highly personalized
aspects of retirement withdrawals. Both also came under considerable pressure throughout the
2008 financial crisis and subsequent extreme market volatility, in many cases risking early
portfolio depletion in addition to retirees’ ability to maintain their lifestyle standards. Accordingly,
many investors are reconsidering how to draw income from their retirement assets more
efficiently, while better acknowledging the realities of market uncertainty.

A dynamic approach helps to address these challenges, adeptly balancing the management of
longevity and lifestyle risk in a more prudent manner throughout a broader array of market
cycles. It also adds the holistic measure of maximizing retirees’ satisfaction with their
withdrawal dollars, strategically embedding the behavioral and emotional components involved
with retirement income into the withdrawal planning process.

While the calculations and portfolio modeling behind this methodology can be complex, the J.P.
Morgan Dynamic Strategy gives financial advisors general guidance to consider when planning
for their clients’ retirement funding needs. Our proprietary model helps investors and their
financial advisors adapt appropriate withdrawal rates and bond exposure on an annual basis,
tailored to the investor’s age, wealth, lifetime income and risk profile. Specific bequests can
also be accommodated. The projected output from this dynamic framework seems to deliver
stronger, steadier payouts throughout retirement, while reducing the risk of either exhausting
portfolio assets too soon or amassing a substantial surplus of money likely to go unused by the
investor. This offers a customized, more realistic withdrawal solution to help retirees
proactively prepare and respond to changes in the market environment, as well as their
individual retirement situations.

J.P. MORGAN ASSE T MA N AG E ME N T 25

 Appendix:
• Technical details of framework
•
Appendix
Calculation of Certainty Equivalent
• Results for varying risk aversion parameter values
• References
Appendix:of certainty equivalent
• Technical details of framework
• Calculation
Exhibit XXX: Technical details of framework
• Technical
• Results details
for varying of framework
risk aversion parameter values
• Calculation of Certainty Equivalent
• References
For those interested, we provide technical details of our utility function and dynamic programming
• Results for varying
algorithm. Werisk aversion
seek parameter
to maximize values
the lifetime expected utility U of the individual as defined by the
• IT A1:
E XH IB References
TEC HNICAL DET AI L S OF F RAMEW ORK
following recursive Epstein-Zin type utility function.
For thoseXXX:
Exhibit interested, we provide
Technical technical
details details of our utility function and dynamic programming algorithm. We seek to maximize the
of framework
lifetime expected utility U of the individual as defined by the following recursive Epstein-Zin type utility function.
𝑈𝑈𝐼𝐼,𝑡𝑡 �𝑊𝑊𝑡𝑡, 𝐺𝐺�
For those interested, we provide technical details of our utility function and dynamic programming
algorithm. We seek to maximize the lifetime expected utility U of the individual as defined by the 1
⎧ Epstein-Zin
following recursive type utility function. 1−1�𝜓𝜓 1−1�𝜓𝜓
𝛽𝛽𝑡𝑡 𝑚𝑚𝑡𝑡 1 ∑ 120
𝛽𝛽𝑖𝑖
𝑚𝑚
⎪�� 120 𝑖𝑖 � (𝐶𝐶𝑡𝑡 + 𝐺𝐺)1− �𝜓𝜓 + � 𝑖𝑖=𝑡𝑡+1 120 𝑖𝑖
𝑖𝑖
� 𝐸𝐸𝑡𝑡 �𝑈𝑈𝐼𝐼,𝑡𝑡+1 (𝑊𝑊𝑡𝑡+1 , 𝐺𝐺)1−𝛾𝛾 � 1−𝛾𝛾 � 𝑓𝑓𝑓𝑓𝑓𝑓 𝑡𝑡 < 120
⎪ ∑ 𝑖𝑖=𝑡𝑡 𝛽𝛽 𝑚𝑚𝑖𝑖 ∑ 𝑖𝑖=𝑡𝑡 𝛽𝛽 𝑚𝑚𝑖𝑖
𝑈𝑈𝐼𝐼,𝑡𝑡 �𝑊𝑊𝑡𝑡, 𝐺𝐺� =
⎨ 1
⎧ 𝑡𝑡
𝛽𝛽 𝑚𝑚
⎪ 1 ∑120 𝑖𝑖
𝛽𝛽 𝑚𝑚𝑖𝑖
1−1�𝜓𝜓 1−1�𝜓𝜓
⎪�� 120 𝑖𝑖𝑡𝑡 ⎪�𝑊𝑊(𝐶𝐶𝑡𝑡 𝑡𝑡++𝐺𝐺𝐺𝐺)1− �𝜓𝜓 + � 𝑖𝑖=𝑡𝑡+1
120 𝑖𝑖
� 𝐸𝐸𝑡𝑡 �𝑈𝑈𝐼𝐼,𝑡𝑡+1 (𝑊𝑊𝑡𝑡+1 , 𝐺𝐺)1−𝛾𝛾 � 1−𝛾𝛾 � 𝑓𝑓𝑓𝑓𝑓𝑓 𝑡𝑡 < 120 𝑓𝑓𝑓𝑓𝑓𝑓 𝑡𝑡 = 120
⎪ ∑𝑖𝑖=𝑡𝑡 𝛽𝛽 𝑚𝑚⎩𝑖𝑖 ∑𝑖𝑖=𝑡𝑡 𝛽𝛽 𝑚𝑚𝑖𝑖
=
⎨
⎪
⎪ 𝑊𝑊=𝑡𝑡 +
W t+1 (W𝐺𝐺 – C ) R 𝑓𝑓𝑓𝑓𝑓𝑓 𝑡𝑡 = 120
t t t
⎩ 𝑊𝑊 𝑡𝑡+1 = (𝑊𝑊𝑡𝑡 − 𝐶𝐶𝑡𝑡 )𝑅𝑅𝑡𝑡
R t = Allocation t • X **
Where 𝑅𝑅𝑡𝑡 = 𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝑛𝑛𝑡𝑡 ⋅ 𝑋𝑋
𝑊𝑊 = (𝑊𝑊𝑡𝑡 − 𝐶𝐶𝑡𝑡 )𝑅𝑅𝑡𝑡
Ct 𝑡𝑡+1 Where
is the couple’s withdrawal from their portfolio at age t

G
𝑅𝑅𝑡𝑡is=the𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝑛𝑛
guaranteed ⋅ 𝑋𝑋 income that the couple has each year
𝑡𝑡 real
C t
from sources such as Social is the individual’s
Security andwithdrawal
annuities from their portfolio at age t
Where
β is the individual’s subjective
G is the discount real
guaranteed factorincome that the individual has each year from sources such as social security
C is the individual’s withdrawal from their portfolio at age t
t
and annuities
mi is the probability that at least one member of the couple is
alive at age i given that
G is the guaranteed real bothincome
members are the
that at age t has each year from sources such as social security
aliveindividual
β is the individual’s subjective discount factor
γand annuities
is the risk aversion parameter of the individual

ψ
β isis the mi is the
individual’s
the individual’s probability
subjective
elasticity thatfactor
discount
of intertemporal the individual is still alive at age i given that the individual is alive at age t
substitution

W is the
m t is theindividual’s
γ is theportfolio
probability value
that aversion
risk the at age t is still alive at age i given that the individual is alive at age t
individual
parameter of the individual
i
X is the random variable representing the joint stock/bond
γ is the risk ψaversion
is the parameter of elasticity
individual’s the individual
of intertemporal substitution
real return distribution
ψ is the individual’s elasticity of intertemporal substitution
Wt is the individual’s portfolio value at age t
Wt is the individual’s portfolio value at age t
X is the random variable representing the joint stock bond real return distribution
X is the random variable representing the joint stock bond real return distribution
26 B R EA K IN G T H E 4% RUL E
We solve the problem for males UM and females UF via
backward induction Wefrom
solveage 120 to 60. The continuous
We solve the problem for the
malesproblem
UM andforfemales
males U
UM and females UF via backward
F via backward induction
induction
from age from
120 to 60. Theage 120 to 60. The
wealth
We to
solveguarantee
the ratio
problem space
for is
males discretized
and in uneven
females via backward induction from age 120
continuous wealth U
to guarantee
M ratio Uspace
F is discretized
continuous wealth to guarantee ratio space is discretized in uneven intervals with a higher in uneven intervals with atohigher
60. The
intervals with
continuous a higher
wealth concentration
to guarantee of points
ratio spacetoward
isThe the
discretized in The
uneven intervals with a mesh
higher
concentration ofconcentration
points towardofthe points
lowertoward
ratios.the lower
value ratios.
function is value function
interpolated is interpolated
between between mesh points
points
lower ratios. The value function is interpolated between mesh
concentration of points
using cubictoward
splines. the
Thelower ratios.
expectation The
over value function
stock-bond-inflation is interpolated
distributions
using cubic splines. The expectation over stock-bond-inflation distributions is done with 10,000 random between
is done mesh
with points
10,000 random
points using cubic splines. The expectation over stock-bond-
using
drawscubic our draws
from splines. from
The
assumed our assumed
expectation
distributions. distributions.
over stock-bond-inflation distributions is done with 10,000 random
inflation distributions is done with 10,000 random draws from
draws
our fromdistributions.
assumed our assumed distributions.
After we solve After
the we solve
problem for the problemwe
individuals forthen
individuals we couples.
solve it for then solve it for couples.
After
Afterwe
wesolve
solvethe problem
the forfor
problem individuals, we we
individuals thenthen
solvesolve
it it for couples.
for couples.
1 1
⎧ ⎧ 1−1� 1−1�𝜓𝜓 1−1�𝜓𝜓 1−1�𝜓𝜓
𝛽𝛽𝑡𝑡 𝑚𝑚𝑡𝑡 𝑡𝑡
𝛽𝛽1− 𝑚𝑚
1�𝑡𝑡 ∑120 𝑖𝑖
𝑖𝑖=𝑡𝑡+1 𝛽𝛽1− 𝑚𝑚1𝑖𝑖� ∑120 𝛽𝛽𝑖𝑖 𝑚𝑚𝑖𝑖 1−𝛾𝛾𝜓𝜓
⎪�� 120 𝑖𝑖 � (⎪ + 𝐺𝐺) 𝑖𝑖 +��(𝐶𝐶𝑡𝑡 120
𝐶𝐶 �� 𝜓𝜓
+ 𝐺𝐺)𝑖𝑖
𝑖𝑖=𝑡𝑡+1
�𝜓𝜓 𝐸𝐸+𝑡𝑡 ��𝑈𝑈𝑡𝑡+1120�𝑊𝑊𝑡𝑡+1, 𝐺𝐺�� � �𝑊𝑊𝑡𝑡+1,𝑓𝑓𝑓𝑓𝑓𝑓
� 𝐸𝐸𝑡𝑡 �𝑈𝑈𝑡𝑡+1 𝐺𝐺��1𝑡𝑡 1−𝛾𝛾
< 120� 𝑓𝑓𝑓𝑓𝑓𝑓 𝑡𝑡 < 120
⎪ ∑𝑖𝑖=𝑡𝑡 𝛽𝛽 𝑚𝑚𝑖𝑖 ⎪𝑡𝑡 ∑120 𝛽𝛽 𝑚𝑚 ∑ 𝛽𝛽 𝑚𝑚 ∑ 𝛽𝛽𝑖𝑖
𝑚𝑚
⎧ 𝑡𝑡 𝑖𝑖=𝑡𝑡 𝑖𝑖 𝑖𝑖=𝑡𝑡 𝑖𝑖
∑𝑖𝑖=𝑡𝑡+1 𝛽𝛽 𝑚𝑚𝑖𝑖
120 𝑖𝑖 𝑖𝑖=𝑡𝑡 𝑖𝑖 1− �𝜓𝜓 1−1�𝜓𝜓
1
𝑈𝑈𝐶𝐶,𝑡𝑡 �𝑊𝑊𝛽𝛽𝑡𝑡, 𝐺𝐺�
𝑈𝑈𝐶𝐶,𝑡𝑡 �𝑊𝑊𝑡𝑡, 𝐺𝐺� = ⎪ 𝑚𝑚𝑡𝑡 = 1−1�𝜓𝜓
⎨⎪�� 120 𝑖𝑖 �⎨(𝐶𝐶𝑡𝑡 + 𝐺𝐺) + � 120 𝑖𝑖 � 𝐸𝐸𝑡𝑡 �𝑈𝑈𝑡𝑡+1 �𝑊𝑊𝑡𝑡+1, 𝐺𝐺�� 1−𝛾𝛾 � 𝑓𝑓𝑓𝑓𝑓𝑓 𝑡𝑡 < 120
∑𝑖𝑖=𝑡𝑡 𝛽𝛽 𝑚𝑚𝑖𝑖 ∑𝑖𝑖=𝑡𝑡 𝛽𝛽 𝑚𝑚𝑖𝑖
⎪ ⎪
𝑈𝑈𝐶𝐶,𝑡𝑡 �𝑊𝑊𝑡𝑡, 𝐺𝐺� =⎪ 𝑊𝑊𝑡𝑡 + 𝐺𝐺 ⎪ 𝑊𝑊𝑡𝑡 + 𝐺𝐺 𝑓𝑓𝑓𝑓𝑓𝑓 𝑡𝑡 = 120 𝑓𝑓𝑓𝑓𝑓𝑓 𝑡𝑡 = 120
⎩⎨ ⎩
⎪
𝑈𝑈𝑡𝑡+1 �𝑊𝑊𝑡𝑡+1, 𝐺𝐺� ⎪𝑈𝑈 𝑊𝑊𝑡𝑡�𝑊𝑊
+ 𝐺𝐺 𝐺𝐺 𝑓𝑓𝑓𝑓𝑓𝑓 𝑡𝑡 = 120
𝑡𝑡+1 𝑡𝑡+1, �
⎩ 𝑊𝑊 (1 − ℎ)𝐺𝐺 1−𝛾𝛾 1−𝛾𝛾 𝑊𝑊 (1 − ℎ)𝐺𝐺 1−𝛾𝛾 1−𝛾𝛾
𝑞𝑞𝑀𝑀,𝑡𝑡 𝑞𝑞𝐹𝐹,𝑡𝑡 𝑈𝑈 (𝑊𝑊𝑡𝑡+1 , 𝐺𝐺𝑞𝑞)1−𝛾𝛾 )𝑈𝑈+ 𝑞𝑞 �(1 −
𝑈𝑈 + 𝑞𝑞(𝑊𝑊(1 −, 𝐺𝐺𝑞𝑞)𝐹𝐹,𝑡𝑡1−𝛾𝛾
𝑡𝑡+1
𝑞𝑞𝐹𝐹,𝑡𝑡, )𝑈𝑈 �𝑊𝑊𝑡𝑡+1
+ (1(1−−𝑞𝑞 ℎ)𝐺𝐺 )𝑞𝑞 𝑈𝑈 + (1� − 𝑞𝑞𝑡𝑡+1 )𝑞𝑞, 𝑈𝑈 � 𝑊𝑊𝑡𝑡+1 (1 − ℎ)𝐺𝐺
𝐶𝐶,𝑡𝑡+1 𝑞𝑞𝑀𝑀,𝑡𝑡 𝐹𝐹,𝑡𝑡 𝐶𝐶,𝑡𝑡+1 𝑀𝑀,𝑡𝑡 𝑡𝑡+1 𝑀𝑀,𝑡𝑡 (1 − 𝑒𝑒)
𝑀𝑀,𝑡𝑡+1 − 𝑒𝑒)�(1 − 𝑒𝑒) , (1 −𝑀𝑀,𝑡𝑡𝑒𝑒) �𝐹𝐹,𝑡𝑡 𝐹𝐹,𝑡𝑡+1
(1𝑀𝑀,𝑡𝑡+1 (1 −𝑀𝑀,𝑡𝑡
𝑒𝑒) 𝐹𝐹,𝑡𝑡
(1 − 𝑒𝑒) �(1 − 𝑒𝑒) , (1 − 𝑒𝑒) �
𝑈𝑈=𝑡𝑡+1 �𝑊𝑊𝑡𝑡+1, 𝐺𝐺� =
𝐹𝐹,𝑡𝑡+1
𝑞𝑞 + 𝑞𝑞 − 𝑞𝑞 𝑞𝑞
𝑀𝑀,𝑡𝑡 𝐹𝐹,𝑡𝑡 𝑀𝑀,𝑡𝑡 𝑞𝑞
𝐹𝐹,𝑡𝑡 + 𝑞𝑞𝐹𝐹,𝑡𝑡 − 𝑞𝑞𝑀𝑀,𝑡𝑡 𝑞𝑞𝐹𝐹,𝑡𝑡
𝑀𝑀,𝑡𝑡
𝑊𝑊𝑡𝑡+1 (1 − ℎ)𝐺𝐺 1−𝛾𝛾 𝑊𝑊𝑡𝑡+1 (1 − ℎ)𝐺𝐺 1−𝛾𝛾
𝑞𝑞 𝑞𝑞 𝑈𝑈 ( 𝑊𝑊 𝑡𝑡+1 , 𝐺𝐺)1−𝛾𝛾
+ 𝑞𝑞 (1 − 𝑞𝑞 )𝑈𝑈 � , � + (1 − 𝑞𝑞 )𝑞𝑞 𝑈𝑈 � , �
𝑊𝑊𝑡𝑡+1 𝑀𝑀,𝑡𝑡= 𝐹𝐹,𝑡𝑡
(𝑊𝑊𝑡𝑡𝐶𝐶,𝑡𝑡+1
− 𝐶𝐶𝑊𝑊
𝑡𝑡 )𝑅𝑅𝑡𝑡 = (𝑊𝑊 − 𝐶𝐶 )𝑅𝑅 𝑀𝑀,𝑡𝑡 𝐹𝐹,𝑡𝑡 𝑀𝑀,𝑡𝑡+1 (1 − 𝑒𝑒) (1 − 𝑒𝑒) 𝑀𝑀,𝑡𝑡 𝐹𝐹,𝑡𝑡 𝐹𝐹,𝑡𝑡+1 (1 − 𝑒𝑒) (1 − 𝑒𝑒)
= 𝑡𝑡+1 𝑡𝑡 𝑡𝑡 𝑡𝑡
𝑞𝑞𝑀𝑀,𝑡𝑡 + 𝑞𝑞𝐹𝐹,𝑡𝑡 − 𝑞𝑞𝑀𝑀,𝑡𝑡 𝑞𝑞𝐹𝐹,𝑡𝑡
W𝑅𝑅t+1𝑡𝑡 = =𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝑛𝑛
(W t – C𝑅𝑅𝑡𝑡 t𝑡𝑡⋅)=𝑋𝑋R𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝑛𝑛
t 𝑡𝑡 ⋅ 𝑋𝑋
h is the percentage of guarantee lost when one member
of the couple dies
R𝑊𝑊Where
𝑡𝑡+1 = (𝑊𝑊𝑡𝑡 − 𝐶𝐶𝑡𝑡 )𝑅𝑅
t = Allocation t X
Where
• 𝑡𝑡 **

e is the percentage spending would go down to maintain

Where
𝑅𝑅C𝑡𝑡t =is the couple’s𝑡𝑡withdrawal
𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝑛𝑛 from their portfolio at age t
Ct is⋅ 𝑋𝑋the couple’s withdrawal from their portfolio at age thet same utility when one member of the couple dies
CWhere
tGisisthe
thecouple’s withdrawal
guaranteed from their
real income portfolio
that the coupleat has t year from sources such as social security and
ageeach
qM,t year
G is the guaranteed real income that the couple has each is thefrom
probability
sourcesthat theasmale
such is still
social alive and
security in one
annuities
G is the guaranteed real income that the couple has each year
annuities year given that he is alive at age t
C is the couple’s withdrawal from their portfolio at age t
t
from
β is sources such as
the couple’s Social Security
subjective discountandfactor
annuities
qF,t is the probability that the female is still alive in one
β is the couple’s subjective discount factor
βGmisisthe
theindividual’s
guaranteed real income
subjective discount that the couple has each year from
factor year sources
given thatsuchshe isasalive
social t
security
at age and
i is the probability that at least one member of the couple is still alive at age i given that both
m is
annuities are alivei at age tthe probability that at least one member of the couple is still alive at age i given that both
mmembers
i is the probability that theare
members individual stilltalive at age i
alive atisage Rt is the random variable representing the real return of
given that
βγisis the the individual
couple’s
the risk
is
subjective
aversion
alive
parameter
at age
discount t factor
of the couple
the portfolio
γ is the risk aversion parameter of the couple
γ is the risk aversion parameter of the individual X is the random variable representing the joint stock/
mψi isisthe
thecouple’s
probability thatofatintertemporal
elasticity least one member of the couple is still
substitution alive at age i given that both
bond real return distribution
ψ is the couple’s elasticity of intertemporal substitution
ψmembers
is the individual’s
are aliveelasticity
at age of t intertemporal substitution
Wt is the couple’s portfolio value at age t Due to the isoelastic nature of our utility function, the
Wt is the couple’s portfolio value at age t
W is
γhisisthethe individual’s portfolio value at age t following identity helps computations immensely
the risk aversion parameterlost of when
the couple
t
percentage of guarantee one member of the couple dies
h is the percentage of guarantee lost when one member of the couple dies
ψ2 is the couple’s elasticity of intertemporal substitution U(λW t, λG) = λU(W t, G)
2
Wt is the couple’s portfolio value at age t

h is the percentage of guarantee lost when one member of the couple dies

2 J.P. MORGAN ASSE T MA N AG E ME N T 27

E XH IB IT A2: CAL CUL A T I ON OF C ERT AIN T Y EQU IVAL EN T(CE )
Exhibit XXX: Calculation of Certainty Equivalent(CE)
CE of each strategy is defined as follows:
CE of each strategy is defined as follows:
1
1−1�𝜓𝜓 1−1�
⎡ ⎤ 𝜓𝜓
1−𝛾𝛾
⎢ 𝑛𝑛𝑛𝑛𝑛𝑛𝑛𝑛𝑛𝑛 1−𝛾𝛾 𝑛𝑛𝑛𝑛𝑛𝑛𝑛𝑛𝑛𝑛 𝐶𝐶𝑖𝑖,𝑗𝑗 + (1 − ℎ)𝐺𝐺 1−𝛾𝛾 ⎥
∑ ∑
⎢ max (𝑑𝑑) 𝑗𝑗 ⎛ 𝑖𝑖=1 𝐼𝐼1,𝑖𝑖,𝑗𝑗 (𝐶𝐶𝑖𝑖,𝑗𝑗 + 𝐺𝐺) + 𝑖𝑖=1 𝐼𝐼2,𝑖𝑖,𝑗𝑗 �
(1 − 𝑒𝑒)
� ⎞ ⎥
∑
⎢ 𝑗𝑗=𝐴𝐴 𝛽𝛽 𝑝𝑝𝑗𝑗 ⎜ 𝑛𝑛𝑛𝑛𝑛𝑛𝑛𝑛𝑛𝑛 ∗ 𝑝𝑝𝑗𝑗 ⎟ ⎥
⎢ ⎥
𝐶𝐶𝐶𝐶 = ⎢ ⎝ ⎠ ⎥
max (𝑑𝑑) 𝑗𝑗
⎢ ∑𝑗𝑗=𝐴𝐴 𝛽𝛽 𝑝𝑝𝑗𝑗 ⎥
⎢ ⎥
⎢ ⎥
⎢ ⎥
⎢ ⎥
⎣ ⎦
And And
∑𝑛𝑛𝑛𝑛𝑛𝑛𝑛𝑛𝑛𝑛
𝑖𝑖=1 𝐼𝐼1,𝑖𝑖,𝑗𝑗 + ∑𝑛𝑛𝑛𝑛𝑛𝑛𝑛𝑛𝑛𝑛
𝑖𝑖=1 𝐼𝐼2,𝑖𝑖,𝑗𝑗
𝑝𝑝𝑗𝑗 =
𝑛𝑛𝑛𝑛𝑛𝑛𝑛𝑛𝑛𝑛
Where
𝐶𝐶 is the couple or individual’s withdrawal from their portfolio at age 𝑗𝑗 in simulation 𝑖𝑖
Where𝑖𝑖,𝑗𝑗
𝐺𝐺 is the guaranteed real income that the couple or individual has each year from sources such as social
C i,j security
is the couple andorannuities
individual’s withdrawal from their portfolio at
age j in simulation i or individual’s subjective discount factor
𝛽𝛽 is the couple
𝑑𝑑𝑖𝑖 is the death age of the individual or last survivor of the couple in simulation 𝑖𝑖
G is𝛾𝛾the is guaranteed
the risk aversionreal income that the of
parameter couple or individual
the couple has
or individual
each𝜓𝜓year from sources such as Social Security and annuities
is the couple or individual’s elasticity of intertemporal substitution
𝐴𝐴 is the starting age of retirement
β is the couple or individual’s subjective discount factor
𝐼𝐼1,𝑖𝑖,𝑗𝑗 is an indicator function of whether a both members of the couple are still alive or not in period 𝑗𝑗 of
d i issimulation
the death age 𝑖𝑖 of the individual or last survivor of the couple
𝐼𝐼
in simulation
2,𝑖𝑖,𝑗𝑗 is an i indicator function of whether one member of the couple is still alive but not both in period 𝑗𝑗 of
simulation 𝑖𝑖
γ is the risk aversion parameter of the couple or individual
We compared them based on our Utility metric and the results are as follows.
ψ is the couple or individual’s elasticity of intertemporal
substitution
(Based on a 5 Risk Aversion, .3 IES, 2% Discount rate, 60% equity allocation for other strategies, 1m
A isinitial wealth,
the starting age 20k guarantee)
of retirement

I 1,i,j is an indicator function of whether both members of the

couple are still alive or not in period j of simulation i

I 2,i,j is an indicator function of whether one member of the

couple is still alive but not both in period j of simulation i

We compared them based on our Utility metric and the results

are as follows.

28 B R EA K IN G T H E 4% RUL E
Results for varying risk aversion parameter values
The results in the body of the paper were completed with the following set of parameter values: γ=5, ψ=0.3, β=.98, h=1/3, e=1/3.
Here are similar results for more risk averse investors (the model run with the following parameter values: γ=7, ψ=0.2, β=.98, h=1/3, e=1/3)

E XH IB IT A3: SUGGESTED AL L OC AT ION S AN D W I T H DRA W A L R A TE S F O R CO M BI NA TI O NS O F A G E , W E A L TH A ND G U A R A NT EED

INCOME FO R CO UPL ES ( S AME AGE)
Couples (same age)—$20,000 guaranteed income
Optimal withdrawal rate Optimal bond allocation
Age Portfolio Value % Age Portfolio Value %
$500,000 $1,000,000 $1,500,000 $2,000,000 $$2,500,000 $500,000 $1,000,000 $1,500,000 $2,000,000 $$2,500,000
60 5.0 4.7 4.6 4.5 4.5 60 39 51 55 58 59
65 5.5 5.2 5.1 5.0 4.9 65 41 52 56 58 59
70 6.2 5.8 5.7 5.6 5.5 70 43 53 57 59 60
75 7.1 6.7 6.5 6.3 6.3 75 45 54 58 59 60
80 8.3 7.8 7.5 7.4 7.3 80 47 55 58 60 61
85 10.0 9.3 9.0 8.9 8.8 85 49 56 59 61 61
90 12.2 11.3 11.0 10.8 10.7 90 51 57 60 61 62
95 14.9 13.9 13.4 13.2 13.1 95 53 58 60 62 62

Couples (same age)—$50,000 guaranteed income

Optimal withdrawal rate Optimal bond allocation
Age Portfolio Value % Age Portfolio Value %
$500,000 $1,000,000 $1,500,000 $2,000,000 $$2,500,000 $500,000 $1,000,000 $1,500,000 $2,000,000 $$2,500,000
60 5.5 5.1 5.0 4.8 4.7 60 10 34 43 48 51
65 6.0 5.7 5.4 5.3 5.2 65 14 36 45 49 52
70 6.8 6.3 6.1 5.9 5.8 70 18 39 46 50 53
75 7.8 7.3 7.0 6.8 6.7 75 23 41 48 52 54
80 9.3 8.5 8.2 7.9 7.8 80 28 44 50 53 55
85 11.2 10.2 9.8 9.5 9.3 85 32 46 52 55 56
90 13.8 12.5 11.9 11.6 11.3 90 36 48 53 56 57
95 17.0 15.3 14.6 14.1 13.9 95 39 50 55 57 58

E XH IB IT A4 : SUGGES T ED AL L OC AT I ON S AN D W I T H DR A W A L R A TE S F O R CO M BI NA TI O NS O F A G E , W E A L TH A ND G U A R A N T EED
INCOME FO R MAL ES
Males—$20,000 guaranteed income
Optimal withdrawal rate Optimal bond allocation
Age Portfolio Value % Age Portfolio Value %
$500,000 $1,000,000 $1,500,000 $2,000,000 $$2,500,000 $500,000 $1,000,000 $1,500,000 $2,000,000 $$2,500,000
60 5.3 4.8 4.6 4.5 4.4 60 37 50 54 57 58
65 5.8 5.3 5.1 5.0 4.9 65 39 51 55 57 59
70 6.5 5.9 5.7 5.5 5.4 70 41 52 56 58 59
75 7.4 6.7 6.4 6.3 6.2 75 43 53 56 58 60
80 8.7 7.8 7.5 7.3 7.2 80 45 54 57 59 60
85 10.3 9.3 8.9 8.7 8.5 85 47 55 58 59 60
90 12.5 11.3 10.8 10.5 10.3 90 48 56 58 60 61
95 15.2 13.7 13.1 12.7 12.5 95 50 57 59 60 61

Source: J.P. Morgan Asset Management. For illustrative purposes only.

J.P. MORGAN ASSE T MA N AG E ME N T 29

E XH IB IT A4 , C O NTINU ED: S U GGES T ED AL L OC AT I ON S A ND W I THD R A W A L R A TE S F O R CO M BI NA TI O NS O F A G E , W E A L TH A N D
G U AR ANTEED INCO M E F OR MAL ES
Males—$50,000 guaranteed income
Optimal withdrawal rate Optimal bond allocation
Age Portfolio Value % Age Portfolio Value %
$500,000 $1,000,000 $1,500,000 $2,000,000 $$2,500,000 $500,000 $1,000,000 $1,500,000 $2,000,000 $$2,500,000
60 6.0 5.4 5.1 5.0 4.8 60 8 31 41 46 50
65 6.7 6.0 5.7 5.4 5.3 65 11 34 43 47 51
70 7.6 6.7 6.3 6.1 5.9 70 15 36 44 49 52
75 8.7 7.7 7.2 6.9 6.7 75 19 38 46 50 53
80 10.3 9.0 8.4 8.1 7.8 80 23 41 48 51 54
85 12.4 10.8 10.0 9.6 9.3 85 27 43 49 52 55
90 15.2 13.1 12.2 11.6 11.3 90 31 45 51 54 56
95 18.4 15.8 14.7 14.1 13.7 95 34 47 52 55 57

E XH IB IT A5: SUGGESTED AL L OC AT ION S AN D W I T H DRA W A L R A TE S F O R CO M BI NA TI O NS O F A G E , W E A L TH A ND G U A R A NT EED

INCOME FO R FEMAL ES
Females—$20,000 guaranteed income
Optimal withdrawal rate Optimal bond allocation
Age Portfolio Value % Age Portfolio Value %
$500,000 $1,000,000 $1,500,000 $2,000,000 $$2,500,000 $500,000 $1,000,000 $1,500,000 $2,000,000 $$2,500,000
60 5.0 4.6 4.4 4.3 4.2 60 36 49 54 56 58
65 5.4 5.0 4.8 4.7 4.6 65 38 50 55 57 58
70 6.0 5.5 5.3 5.2 5.1 70 40 51 55 57 59
75 6.8 6.2 6.0 5.8 5.7 75 42 52 56 58 59
80 7.9 7.2 6.9 6.7 6.6 80 44 53 57 59 60
85 9.4 8.5 8.1 7.9 7.8 85 46 54 57 59 60
90 11.3 10.2 9.8 9.5 9.3 90 47 55 58 60 61
95 13.7 12.4 11.8 11.5 11.3 95 49 56 59 60 61

Females—$50,000 guaranteed income

Optimal withdrawal rate Optimal bond allocation
Age Portfolio Value % Age Portfolio Value %
$500,000 $1,000,000 $1,500,000 $2,000,000 $$2,500,000 $500,000 $1,000,000 $1,500,000 $2,000,000 $$2,500,000
60 5.6 5.1 4.9 4.7 4.6 60 6 30 40 46 49
65 6.2 5.6 5.3 5.1 5.0 65 9 32 42 47 50
70 7.0 6.2 5.9 5.7 5.5 70 13 35 43 48 51
75 8.0 7.1 6.7 6.4 6.2 75 17 37 45 49 52
80 9.4 8.2 7.7 7.4 7.2 80 21 39 47 51 53
85 11.2 9.8 9.1 8.7 8.5 85 25 42 48 52 54
90 13.7 11.8 11.0 10.5 10.2 90 29 44 50 53 55
95 16.6 14.3 13.3 12.7 12.4 95 33 46 51 54 56

30 B R EA K IN G T H E 4% RUL E
References
Bengen, William P. 1994. “Determining Withdrawal Rates Using
Historical Data.” Journal of Financial Planning 7, 4 (October):
171–180.
Epstein, Larry G. and Stanley E. Zin. 1989. “Substitution Risk
Aversion and the Temporal Behavior of Consumption and
Asset Returns: A Theoretical Framework.” Econometrica,
vol. 57, issue 4 (July): 937–969.
Sheikh, A., and H. Qiao. “Non-Normality of Market Returns:
A Framework for Asset Allocation Decision Making.” The Journal
of Alternative Investments, vol. 12, no. 3 (2010), pp. 8–35.

Asset Management Solutions Quantitative Strategies and Research Team

Yazann Romahi, Ph.D., CFA Abdullah Sheikh, FSA Amy Zhou, Ph.D.
Managing Director Vice President Associate

Grace Koo, Ph.D. Victor Li, Ph.D., CFA Jonathan Msika, CFA
Executive Director Vice President Associate

Katherine Santiago, CFA Jeff Sun Albert Chuang

Executive Director Associate Analyst

The information and methodologies described herein are proprietary and patent pending to J.P. Morgan Asset Management and affiliates.
Because of the inherent limitations of all models, potential investors should not rely exclusively on the model when making a decision. The model cannot account
for the impact that economic, market and other factors may have on the implementation and ongoing management of an actual investment portfolio. Unlike actual
portfolio outcomes, the model outcomes do not reflect actual trading, liquidity constraints, fees, expenses, taxes and other factors that could impact the future
returns. The model assumptions are passive only—they do not consider the impact of active management. A manager’s ability to achieve similar outcomes is subject
to risk factors over which the manager may have no or limited control.
IRS Circular 230 Disclosure: JPMorgan Chase & Co. and its affiliates do not provide tax advice. Accordingly, any discussion of U.S. tax matters contained herein
(including any attachments) is not intended or written to be used, and cannot be used, in connection with the promotion, marketing or recommendation by
anyone unaffiliated with JPMorgan Chase & Co. of any of the matters addressed herein or for the purpose of avoiding U.S. tax-related penalties.
Opinions and estimates offered constitute our judgment and are subject to change without notice, as are statements of financial market trends, which are based on
current market conditions. We believe the information provided here is reliable, but do not warrant its accuracy or completeness. This material is not intended as an
offer or solicitation for the purchase or sale of any financial instrument. The views and strategies described may not be suitable for all investors. This material has
been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, accounting, legal or tax advice. References to future
returns are not promises or even estimates of actual returns a client portfolio may achieve. Any forecasts contained herein are for illustrative purposes only and are
not to be relied upon as advice or interpreted as a recommendation.
JPMorgan Funds are distributed by JPMorgan Distribution Services, Inc., which is an affiliate of JPMorgan Chase & Co. Affiliates of JPMorgan Chase & Co. receive fees
for providing various services to the funds. Products and services are offered by JPMorgan Distribution Services, Inc., a member FINRA/SIPC.
J.P. Morgan Asset Management is the marketing name for the asset management businesses of JPMorgan Chase & Co. Those businesses include, but are not limited
to, JPMorgan Chase Bank N.A., J.P. Morgan Investment Management Inc., Security Capital Research & Management Incorporated and J.P. Morgan Alternative Asset
Management, Inc.
© JPMorgan Chase & Co., February 2014

J.P. MORGAN ASSE T MA N AG E ME N T 31

J . P. M O R G A N A S S E T M A N A G E M E N T
270 Park Avenue I New York, NY 10017

© JPMorgan Chase & Co.

RI-DYNAMIC-0214