International Diversification and Safe Withdrawal Rates

My new column, “Does International Diversification Improve Safe Withdrawal Rates?” is now available from Advisor Perspectives

International diversification is a relatively understudied topic in safe withdrawal rate studies. The classic studies usually just look at US stocks and US bonds. What’s more, when international diversification has been considered, it has (as far as I know) always been in the context of a US based investor.

In this new column, I focus on 50/50 portfolios of stocks and bonds using financial market data for 20 developed market countries since 1900. In the past, I have investigated this question assuming hypothetical investors in each country invested only in their local assets. Now, I also consider retirees in each country holding 50/50 globally diversified portfolios [meaning, 50% global stocks and 50% global bonds, GDP-weighted in each case] with returns calculated in terms of their local currency. These individuals do not hedge currency risk. Now we can see the impact of global diversification on withdrawal rate outcomes over rolling 30-year retirement periods.  

Here are some key results:

  • For 50/50 portfolios invested domestically, across the 20 countries the historical success rate for the 4% rule was only 65.7% [using this particular dataset, 4% worked 91.7% of the time for US retirees investing domestically]
  • With globally diversified 50/50 portfolios, the global historical success rate for the 4% rule increased to 78.3%. For US investors, the global portfolio supported a success rate of 80.9%.
  • Across the 20 countries, global portfolios supported higher withdrawal rates than domestic portfolios in 66.4% of cases. In the US, the split was even with global portfolios outperforming domestic portfolios precisely 50% of the time.

The article includes tables and figures that provide a lot more detail. As we can see, while global diversification helps more often than not, such diversification does not provide a complete panacea for market risk in retirement. 


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  • Larry Frank says:

    That is a great article Wade. It is similar to your Journal of Financial Planning paper “Capital Market Expectations, Asset Allocation, and Safe Withdrawal Rates” (Jan 2012) when one thinks about what asset allocation really does at the end of the day – how return and standard deviation subtly change the prudent withdrawal rate over a defined rolling time period (periods that, in reality, continually shortens as one ages – not in that paper, but could be applied).

    I couldn’t tell from your paper above if inflation you used was that experienced individually in each country? You mentioned your analysis was converted back to their currency, and purchasing power would be different for each country.

    Maybe some of the effect seen in those tables is actually due to differences in purchasing power of the different currencies (currency conversion effect as another variable over and above asset class returns and standard deviations)?

  • dearieme says:

    First, my thanks for your fascinating work.

    Secondly, may I take it that the data in table 1 of your new column refer to withdrawals from which charges and tax must then be paid? So, for example, in the UK I could withdraw approx 3%p.a. but would then have to pay my income tax (and any capital gains tax) on that?

    Thirdly, do your calculations assume annual rebalancing of the portfolio between stocks and bonds?

  • Wade Pfau says:


    Thanks. Yes, I used the actual inflation for each country. I think that not hedging currency risk can be helpful, especially in inflationary environments. High inflation leads to depreciation which boosts returns on foreign assets.

    The differences between the countries are all driven by the exchange rates and inflation.

  • Wade Pfau says:


    The assumptions I used were that there is no expense percentage charged from the portfolio, and that the account is tax deferred. So yes, I am assuming that you pay any taxes and fees out of your withdrawal amounts.

    And yes, I assume annual rebalancing to the 50/50 portfolio.

  • Anonymous says:

    Well done Wade. as usual. Wonder if you are aware of a study examining international diversification and withdrawal rates by the Trinity study authors, FPA Journal 2003 I believe. Came to the opposite conclusion but, to be kind, I recall it being considerably less thorough then your examination. Best wishes, Fred

  • Wade Pfau says:

    Thank you, Fred.
    I do remember reading the article you’ve mentioned, but it’s been a while. I can’t remember the specifics. It certainly is one I had in mind when I said there have been a few studies which have looked at international diversification from the perspective of a US based retiree. Well, I’ve got a copy of the article. Here is their abstract:

    The research reported here examines the effect of international equity diversification on the sustainability of a range of withdrawal rates from retirement portfolios with varying U.S. and international stock/bond asset allocations. Sustainability of a withdrawal rate is measured by portfolio success rates—that is, the percentage of 1,000 simulated portfolios of a rebalanced asset allocation that completed 15-, 20-, 25- and 30-year payout periods with positive values. Although the return/risk impact of international stocks on U.S. portfolios has changed over the past 30 years, our research suggests that retirees with portfolios composed of 50 percent equities or greater would benefit only modestly in the long run from international diversification.

    Well, their study is a bit different. They use Monte Carlo simulations to look at adding the MSCI EAFE to a portfolio. No international bonds. And importantly, their entire study is based on 1970-2001 data only, from the perspective of a US investor.

    For a 50/50 portfolio over 30 years, they have a 95% success rate for 4% without the EAFE, and 96% success with EAFE.

  • Wade – Thank you for the work that you do. Investors and advisors everywhere should be grateful.

    Regarding the Trinity study you reference, the results aren’t too surprising. The addition of MSCI EAFE to a portfolio of U.S. stocks doesn’t carry nearly as much of a diversification benefit as adding emerging markets or international small and value, for example. Not much unique risk for investors to benefit from, particularly as the correlation of the S&P 500 and MSCI EAFE has risen greatly over time.

  • Anonymous says:

    Emerging markets stocks? Simply because some asset class has a (previously) low correlation with US stocks doesn’t of necessity make it a prudent investment, especially for retirees. Correlations are non-stationary, particularly with volatile assets. We’re speaking of countries where the finance minister is dismissed because he gave an honest figure for inflation or the government confiscates the worker’s retirement savings on some pretext. And sometimes the ammo box trumps the ballot box.

    I have never understood the over-emphasis on value and/or small cap stocks. The fact that, in the past, they outperformed the overall market has been known for decades. Why shouldn’t this advantage be arbitraged away by those better able to bear the increased risk than I ? Hedge funds, university endowments, pension funds or foundations. The same folks who profess a belief in efficient markets propose investing in these now well known inefficiencies. Fred