Michelle Black
Target date solutions portfolio manager
Retirement income trade-offs, simplified
Capital Group's distinctive approach to target date investing actively manages assets for approximately 30 years after retirement to help turn hard-earned assets into enduring income. Our research-backed withdrawal frameworks can help illustrate trade-offs between dollars and durability during a consequential phase of people's lives.
Our research
- 100,000 simulated return paths modeled across a broad range of hypothetical market environments, including adverse scenarios
- Modeled across fixed and variable withdrawal scenarios
- Frameworks designed to help participants navigate practical trade-offs between income stability and asset durability
Two approaches, different priorities
Fixed
4.0% — 4.5%
Starting at age 65. Taken as a percentage of the balance at retirement. The initial dollar amount increases annually based on an assumed rate of inflation (2.25% in the modeling).
Primary goal:
Stable income stream
Key trade-off:
Predictable income year-to-year, but with a higher risk of depletion if portfolio returns are unfavorable
Stress-tested:
Evaluated for resilience in hypothetical adverse scenarios including Social Security benefit reductions, inflation spikes and market drawdowns
May fit:
Retirees with higher fixed and recurring expenses and less spending flexibility
Variable
5.0% — 5.5%
Starting at age 65. Taken as a percentage of the most recent year-end balance. Income rises or falls based on portfolio performance.
Primary goal:
Asset longevity
Key trade-off:
Lower chance of portfolio depletion but income is unpredictable and may decrease year-to-year
With RMDs:
Median case modeling outcomes indicate around 74% of initial balance retention at age 95
May fit:
Retirees with flexible discretionary spending, other income sources or a bequest goal
Not intended to prescribe a single outcome or replace individualized financial advice.
Withdrawal rates are suggestions only and should be evaluated over time. These ranges are a starting point for discussion; the actual rate should be determined by the financial professional and retiree based on the individual's goals and circumstances. The withdrawal rate may need to be adjusted to maintain sustainability in various market conditions. Rates should be determined by individual investors as one part of their total retirement income picture, including Social Security or other sources of guaranteed or interest income.
WITHDRAWAL FRAMEWORKS WHITE PAPER
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About the analysis
The withdrawal ranges and modeling presented here use Capital Group’s valuation-independent capital market assumptions (CMAs), which are derived from historical market proxies estimating the return, risk and correlation characteristics of the underlying sub-asset-class exposures within the glide paths for Capital Group’s all-active and Blend target date strategies. To arrive at these hypothetical outcomes, we used a Monte Carlo simulation to evaluate 100,000 hypothetical return paths across a broad range of potential market scenarios, including adverse outcomes, and excluded the potential impact (positive or negative) of active management. The analyses therefore reflect market-based assumptions and are presented for informational purposes only; they are not intended to represent specific performance or outcomes of the Capital Group Target Date Retirement Strategies.
Disclosures
Investments are not FDIC-insured, nor are they deposits of or guaranteed by a bank or any other entity, so they may lose value.
Although target date portfolios are managed for investors on a projected retirement date time frame, the allocation strategy does not guarantee that investors' retirement goals will be met.
All Capital Group trademarks mentioned are owned by The Capital Group Companies, Inc., an affiliated company or fund. All other company and product names mentioned are the property of their respective companies.
This content, developed by Capital Group, home of American Funds, should not be used as a primary basis for investment decisions and is not intended to serve as impartial investment or fiduciary advice.
Capital Client Group, Inc.
Use of this website is intended for U.S. residents only.
RMDs are required minimum withdrawals.
Advisory services offered through Capital Research and Management Company (CRMC) and its RIA affiliates. Capital Client Group, Inc., member FINRA.