Withdrawal strategy - which one is best?

Have a question about your personal investments? No matter how simple or complex, you can ask it here.
Post Reply
Topic Author
jtelwood
Posts: 191
Joined: Wed Jun 11, 2008 9:45 am

Withdrawal strategy - which one is best?

Post by jtelwood »

I have read a considerable number of publications on withdrawal strategies during the past several months and have winnowed the list to 2 - constant dollar and constant percentage. Initially, I thought the constant dollar method using Jonothan Guyton's withdrawal rules made the most sense to me. Now, I'm leaning toward the constant percentage. I suspect that I'm probably 'over-thinking' this decision, but wanted to engage in some discussion on this subject with folks on the forum before making a decision. What would be the top 3-4 rules or principles (eg.criteria) that I should consider in evaluating which of these 2 withdrawal methods is most appropriate for me?

Your insights are greatly appreciated.

j elwood
pkcrafter
Posts: 14845
Joined: Sun Mar 04, 2007 12:19 pm
Location: CA
Contact:

Post by pkcrafter »

The constant percentage method will give you variable income year to year, which some people don't like. Have you reviewed the hybrid floor and ceiling method?

https://personal.vanguard.com/us/insigh ... Channel=AN


Paul
When times are good, investors tend to forget about risk and focus on opportunity. When times are bad, investors tend to forget about opportunity and focus on risk.
livesoft
Posts: 76166
Joined: Thu Mar 01, 2007 8:00 pm

Post by livesoft »

Are you saying that you are not going to withdraw what you need for expenses?

Perhaps the question can be turned around: "How do you figure out how much to spend each year in retirement?"

I have read that you have some required expenses and some discretionary expenses. You make sure that you can always pay the required expenses.

One does not withdraw money simply because you are a slave to some percentage you read on the internet.
Wiki This signature message sponsored by sscritic: Learn to fish.
dbr
Posts: 35636
Joined: Sun Mar 04, 2007 9:50 am

Post by dbr »

The first question is what is your objective? It sounds like you are trying to find out the maximum amount of money you can withdraw from the portfolio with acceptable safety. Alternatively, you may be trying to engineer the safest withdrawal scheme that supplies a given minimum of income. In both cases there are choices about how to sequence the withdrawals.

A second question is how do any of the schemes line-up with what you expect and with what you want to spend in retirement?

A third question is what are your income sources and how dependent are you in the total picture on correctly engineering your withdrawal scheme. How much contingency is built into your expected budget?

An observation is that withdrawal schemes are built around computations that are uncertain although the authors seldom generate that essential piece of data, an estimate of the uncertainty, as if they could.

A second observation is that life events are subject to uncertainty as well.

One might keep in mind that withdrawal studies are immensely useful for understanding how finances work in retirement and for estimating some targets and bounds. I am not sure they are such good tools for actually engineering a plan.
john94549
Posts: 4638
Joined: Tue Jul 26, 2011 8:50 pm

Post by john94549 »

Your tummy (might I be over-thinking this?) is probably correct. For us, believe it or not, the accumulation phase was relatively easy. We just maxed out everything we could for 30 years or so, in a balanced port.

The distribution phase gave me major heartburn. Should we do this, should we do that, this study says this, that study says that. Do we use top-down or bottom-up?

Finally decided to use the 4% SWR rule-of-thumb for planning purposes. When we do start the withdrawal phase (probably in a couple of years), I'll no doubt tweak the 4%. But the 4% does seem to fit our projected retirement expenses (above and beyond other income sources).
User avatar
Sheepdog
Posts: 5710
Joined: Tue Feb 27, 2007 3:05 pm
Location: Indiana, retired 1998 at age 65

Post by Sheepdog »

I have used the constant percentage withdrawal method for 13 years with success.
To make it work in up and down valuation years and up and down spending years for me was to set the percentage to be the average. Don't always take the same percentage every year....Keep aside some on normal years in order to have enough for larger expense years, such as home remodeling or new car purchase. Keep spending within the average over the years.
My goal was 4.5% average and has averaged that; however, withdrawals have been as low as 3.11% and as high as 6.57%.
Jim
All that truly matters in the end is that you loved.
ResNullius
Posts: 2091
Joined: Wed Oct 24, 2007 3:22 pm

Post by ResNullius »

We're still feeling things out. For decades, we just saved and invested, but when I retired last year, it became necessary to actually thing about things in terms of making out portfolio last as long as needed. At the end of this year, I'll know exactly what we spent this year, and I'll look to see what withdrawal rate will support that lifestyle. My hope and anticipation is that we'll be able to life our normal lifestyle virtually forever, with higher spending during the last ten years due to nursing homes and such. Good luck to us all.
YDNAL
Posts: 13774
Joined: Tue Apr 10, 2007 4:04 pm
Location: Biscayne Bay

Re: Withdrawal strategy - which one is best?

Post by YDNAL »

jtelwood wrote:I have read a considerable number of publications on withdrawal strategies during the past several months and have winnowed the list to 2 - constant dollar and constant percentage.
You withdraw what you need to pay bills. If you are withdrawing too much, you have too many bills, and viceversa.
jtelwood wrote:I suspect that I'm probably 'over-thinking' this decision,...
That's possible! :D
Landy | Be yourself, everyone else is already taken -- Oscar Wilde
dbr
Posts: 35636
Joined: Sun Mar 04, 2007 9:50 am

Post by dbr »

What I have done is estimate what will be needed in comparison to sources of income with a substantial contingency. That plan has been vetted against a range of retirement models to verify that it is highly unlikely to fail. The computation is not simple because both spending profiles and income profiles are lumpy with significant additions to or removal from either and the fact that some expenses and income streams are subject to different estimates of inflation or cost of living variation than another. For a starter, even FireCalc allows a lot of the variations I am talking about. I think a very important thing to do is test the sensitivity of the result to your inputs. Looking at the effect of how much contingency in expenses you allow on outcome is helpful. A more complex problem is to examine what effect a default of a pension might have or how future taxation or means testing of SS might cut prospects.

It would be impossible to apply any simple 4%, constant dollar, Bengen, Guyton, or someone else rule to this.
User avatar
Leif
Posts: 3201
Joined: Wed Sep 19, 2007 4:15 pm

Post by Leif »

The advantage of using a % is your portfolio is allowed to adjust to changes in market value. The downside, of course, is your "income" wll vary. If your withdrawal at 4-5% is more than you need I would go with a %. If you don't have much "slack" then perhaps a constant dollar approach is better.

A reason I like the %, adjusted each year, is that I can go with a higher % early in retirement and it will scale back, in dollar terms, in late retirement. Studies show typically we spend less in late retirement.

If you would like to leave a larger inheritance then constant dollar is probably better.

I'm planning on using %, but with an increasing %. Something similar to what Stein proposes. I'm not planning on leaving a large inheritance.

I always pay for my cars in cash. So year I'll set aside some cash for a new car.
User avatar
nisiprius
Advisory Board
Posts: 43454
Joined: Thu Jul 26, 2007 9:33 am
Location: The terrestrial, globular, planetary hunk of matter, flattened at the poles, is my abode.--O. Henry

Post by nisiprius »

I like Taylor Larimore's the best: Safe Withdrawal Rates ? Complexity vs. Simplicity. And it's not theory, he's done it. Here's Taylor's method:
We simply withdrew what we needed and kept an eye on our portfolio balance. Most years our balance went up and we spent the money on vacations, luxuries and charity. When our balance went down we tightened our belt and economized.
For an actual numerical rule, I'm intrigued by Rick Ferri's, which I've codified in my own words as:

* use all of the actual income stream from the investment portfolio--no reinvestment;
* in addition, if you are not concerned about leaving a legacy, liquidate up to 2%/year of the investments themselves, as needed or wished, but no more.
* regulate your spending to stay within the withdrawals that this regime allow.

The words of the original Trinity study are important:
The word planning is emphasized because of the great uncertainties in the stock and bond markets. Mid-course corrections likely will be required, with the actual dollar amounts withdrawn adjusted downward or upward relative to the plan. The investor needs to keep in mind that selection of a withdrawal rate is not a matter of contract but rather a matter of planning.
I feel that anyone who wishes more certainty than implied by the above comments should consider using an income annuity.

I would reinterpret the 4% rule to mean "someone who follows Taylor's method and keeps records will probably find that their actual withdrawals have averaged something in the rough ballpark of 4%."

I flatly do not believe that there are withdrawal systems that will increase your safe withdrawal rate by a dramatic amount. For example, I don't think there any way you can safely get the 7% that Peter Lynch suggested in 1995.
Annual income twenty pounds, annual expenditure nineteen nineteen and six, result happiness; Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.
User avatar
Leif
Posts: 3201
Joined: Wed Sep 19, 2007 4:15 pm

Post by Leif »

nisiprius wrote:For an actual numerical rule, I'm intrigued by Rick Ferri's, which I codified in my own words as:

* use all of the actual income stream from the investment portfolio--no reinvestment;

* in addition, if you are not concerned about leaving a legacy, liquidate up to 2%/year of the investments themselves, as needed or wished, but no more.

* regulate your spending to stay within the withdrawals that this regime allow.
That is a typical income approach. Very conservative. But, also sensitive to what the FRB decides what to do with rates. I prefer the total return approach.
User avatar
archbish99
Posts: 1649
Joined: Fri Jun 10, 2011 6:02 pm

Post by archbish99 »

(Taken with the grain of salt that I'm nowhere close to actually doing this....)

I'm attracted by the Guyton model, though it's required some thinking to flesh out because he's not terribly clear in his papers about how to actually implement it.

I think it works something like this:
* Initial withdrawal rate is your target percentage, e.g. 4%
* For each subsequent year, compute a proposed withdrawal rate which is the previous year's withdrawal increased for inflation.
* Divide by the total portfolio value and adjust with:
- If less than 80% of target percentage (e.g. < 3.2% of portfolio), actual withdrawal is 110% of proposed withdrawal
- If between 80% and 100% of target percentage (e.g. 3.2% to 4%), actual withdrawal is proposed withdrawal
- If between 100% and 120% of target percentage (e.g. 4% to 4.8%), actual withdrawal is:
+ Proposed withdrawal if portfolio return was positive in last year
+ Last year's withdrawal if portfolio return was negative in last year
- If more than 120% of target percentage (e.g. > 4.8%), actual withdrawal is 90% of proposed withdrawal
* Move the year's withdrawal out of the account; rebalance the remainder:
- Start with 10% in cash-like investments (money market, CDs, etc.)
- In good times, take withdrawals from overweighted asset classes and rebalance to keep the cash at 10%.
- In bad times, take the withdrawals from cash and rebalance only among the non-cash investments.

It's complicated, but I like the guard rails. It maps well to salary cuts, pay freezes, raises, and promotions; I think we're all pretty accustomed to budgeting around those, which makes for an easy transition to a retirement "paycheck."
ResNullius
Posts: 2091
Joined: Wed Oct 24, 2007 3:22 pm

Post by ResNullius »

nisiprius wrote:I like Taylor Larimore's the best: Safe Withdrawal Rates ? Complexity vs. Simplicity. And it's not theory, he's done it. Here's Taylor's method:
We simply withdrew what we needed and kept an eye on our portfolio balance. Most years our balance went up and we spent the money on vacations, luxuries and charity. When our balance went down we tightened our belt and economized.
For an actual numerical rule, I'm intrigued by Rick Ferri's, which I've codified in my own words as:

* use all of the actual income stream from the investment portfolio--no reinvestment;
* in addition, if you are not concerned about leaving a legacy, liquidate up to 2%/year of the investments themselves, as needed or wished, but no more.
* regulate your spending to stay within the withdrawals that this regime allow.

The words of the original Trinity study are important:
The word planning is emphasized because of the great uncertainties in the stock and bond markets. Mid-course corrections likely will be required, with the actual dollar amounts withdrawn adjusted downward or upward relative to the plan. The investor needs to keep in mind that selection of a withdrawal rate is not a matter of contract but rather a matter of planning.
I feel that anyone who wishes more certainty than implied by the above comments should consider using an income annuity.

I would reinterpret the 4% rule to mean "someone who follows Taylor's method and keeps records will probably find that their actual withdrawals have averaged something in the rough ballpark of 4%."

I flatly do not believe that there are withdrawal systems that will increase your safe withdrawal rate by a dramatic amount. For example, I don't think there any way you can safely get the 7% that Peter Lynch suggested in 1995.
This is one of the more simple and excellent explanations of a SWR. Personally, I'm hoping to be able to allow for reinvestment of cap gain distributions, then spending dividends and interest. This would allow for some continued upward growth, but I would spend the cap gains if needed to maintain our desired lifestlye, which includes gifting and charities each year. SS also gives us a large boost, but much of that likely will go to increasing healthcare costs.
Topic Author
jtelwood
Posts: 191
Joined: Wed Jun 11, 2008 9:45 am

withdrawal strategy

Post by jtelwood »

This subject received considerably more reponses than I had anticipated. All of which were greatly appreciated. My take-away, I was 'over-thinking' this decision; and I blame it on my fiscal conservative genes.

Again, thanks for the postings, particularly the actual experiences from those who are retired.

j elwood
Post Reply