Safe Withdrawal Rate: Global Stocks vs. US Stocks

In the world of investing, determining the safe withdrawal rate is a crucial factor for long-term financial planning. The safe withdrawal rate refers to the percentage of a portfolio that can be withdrawn annually without the risk of running out of money. This article compares the safe withdrawal rate for global stocks versus US stocks, exploring the differences and providing insights for investors.

Understanding the Safe Withdrawal Rate

The safe withdrawal rate is typically determined by historical data and simulations. It is based on the assumption that the portfolio will generate a certain level of return over time. A common rule of thumb is the 4% rule, which suggests that investors can withdraw 4% of their portfolio in the first year of retirement and adjust the withdrawal amount for inflation in subsequent years.

Global Stocks vs. US Stocks

When comparing the safe withdrawal rate for global stocks versus US stocks, several factors come into play. One of the primary considerations is the historical performance of each market.

Global Stocks:

Global stocks, which include shares from companies in various countries around the world, have historically offered a higher return than US stocks. This is due to the diversification benefits of investing in different markets, which can help to mitigate risk. According to a study by Vanguard, the average annual return for a global stock portfolio over the past 30 years has been around 6.5%.

However, global stocks also come with higher volatility and potential currency exposure. This means that the safe withdrawal rate for global stocks may be lower than that for US stocks, as investors need to be more cautious about the risks associated with investing in international markets.

US Stocks:

US stocks, on the other hand, have historically offered a lower return than global stocks. This is primarily due to the higher valuation levels of US companies compared to their international counterparts. However, US stocks are often considered to be more stable and less volatile, which can make them a more suitable option for investors looking for a conservative investment strategy.

According to a study by Fidelity, the average annual return for a US stock portfolio over the past 30 years has been around 7.3%. This suggests that the safe withdrawal rate for US stocks may be higher than that for global stocks, as investors may be more comfortable with the lower volatility and higher return potential.

Case Study:

To illustrate the differences between global stocks and US stocks, let's consider a hypothetical scenario. Imagine an investor with a $1 million portfolio who wants to determine the safe withdrawal rate for their retirement.

If the investor chooses a global stock portfolio, they might expect a return of around 6.5% per year. Using the 4% rule, they could withdraw $40,000 in the first year, with adjustments for inflation in subsequent years.

In contrast, if the investor chooses a US stock portfolio, they might expect a return of around 7.3% per year. Using the 4% rule, they could withdraw $40,000 in the first year, with adjustments for inflation in subsequent years.

While both scenarios result in the same initial withdrawal amount, the investor may feel more comfortable with the US stock portfolio due to its lower volatility and higher return potential.

Conclusion

In conclusion, the safe withdrawal rate for global stocks versus US stocks depends on various factors, including historical performance, volatility, and risk tolerance. While global stocks offer the potential for higher returns, they also come with higher volatility and potential currency exposure. US stocks, on the other hand, are generally considered to be more stable and less volatile. Investors should carefully consider these factors when determining their safe withdrawal rate and choosing the appropriate investment strategy for their retirement.

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