For those who use the standard four per cent withdrawal rate for retirement savings, it’s time to reconsider the approach.

“The four per cent withdrawal rate has long been presumed the industry standard for investors entering retirement, but this rate is no longer optimal,” says Vjosana Klosi, director of portfolio construction at CIBC Asset Management Inc. and co-author of a May 2017 research paper on sustainable withdrawal rates.

Why? “The [four per cent] rate was determined by financial planning practitioners as early as 1994,” says Klosi.

“It was based on models [that] relied on historical returns to determine the performance of a balanced portfolio with 60 per cent exposure to equities and 40 per cent exposure to debt,” she adds.

And those historical returns are relatively high: up to 10 per cent, on average, for Canadian equities, and up to seven per cent for Canadian bonds. On a 10-year basis, however, returns are considerably lower, closer to six per cent for Canadian equities and about half of that for Canadian bonds, says Klosi.

Read: Tips for implementing a living standards replacement rate

Given this discrepancy, her firm has revised its long-term return expectations for balanced portfolios. “The main reason why . . . is that, during the past nine years, the downward sloping trend for rates has resulted in increased valuations for fixed income,” she says, adding that the forecasted return for long-term Canadian bond yields is now 2.5 per cent.

“Even though [withdrawal rates] are expected to increase in the long run, the forecasted expected rates should not be higher than 2.8 per cent to 3 per cent, which is still lower than the historical [withdrawal] target of four per cent,” Klosi adds.

For equities, “lower growth rates and demographics in developed markets have resulted in lower expected returns for equities in general and, therefore, lower expected returns for balanced portfolios,” she says.


Along with expected returns, an investor’s risk profile affects the withdrawal rate.

For investors with a medium-risk profile, who are willing to accept a 10 per cent probability of their portfolio having no residual value, the recommended withdrawal rate is between 3.5 per cent and 3.75 per cent, according to Klosi.

Read: Retirees feeling positive despite warnings of a pension crisis

Overall, depending on an investor’s risk appetite, Klosi says recommended withdrawal rates vary between 2.5 per cent and four per cent.

“Investors who are willing to take on additional risk can increase their target withdrawal rates,” she says. Of course, those investors would also have to accept a greater failure probability, of above 10 per cent.

This article originally appeared on the website of Benefits Canada‘s companion publication,, and is part of the AdvisorToGo podcast. Listen to the full podcast on AdvisorToGo.

Copyright © 2018 Transcontinental Media G.P. Originally published on

Add a comment

Have your say on this topic! Comments that are thought to be disrespectful or offensive may be removed by our Benefits Canada admins. Thanks!

* These fields are required.
Field required
Field required
Field required