Withdrawal Strategies: Articles and More (Updated 8/19/09)
Introduction In this introduction, I will summarize five categories of withdrawal strategies. I will present them in order of capital required. This particular discussion excludes external sources of income such as social security and pension income. Also, in this discussion, I will assume that a 65 year old retiree will have a 30-year lifespan. Constant Percentage In this withdrawal method, the retiree withdraws a fixed percentage from the nest egg. During bear markets, the annual withdrawal will be less. Conversely, during bull markets, the annual withdrawal will be more. This method would only be suitable for retirees who can handle fluctuating income. The starting nest egg should be at least 20 times the first year's withdrawal. Constant Dollar Amount In this withdrawal method, the retiree withdraws a fixed dollar amount from the nest egg. A small additional amount (usually 3%) can be withdrawn each year to maintain inflation-adjusted purchasing power. The starting nest egg should be at least 25 times the first year's withdrawal. Hybrid While the "Constant Percentage" method may cause year-to-year withdrawals to fluctuate too much, the "Constant Dollar" method may feel too rigid. There may be a human tendency to be more cautious after a year of poor returns and take a somewhat smaller withdrawal. Likewise, one may want to celebrate a bit after a year of generous returns and take a somewhat larger withdrawal. To account for these human tendencies, some authors have devised ways to combine elements of both the "Constant Percentage" method and the "Constant Dollar" method. I have written an article that describes these hybrid strategies. Click HERE. The starting nest egg should be at least 25 times the first year's withdrawal. Dividend Only In this withdrawal method, the retiree abandons fixed income securities and instead owns a collection of dividend paying stocks. The retiree relies on shrewd stock selection and the ability of his stocks to pay a steady and ever increasing annual dividend. In contrast with the "Constant Percentage" and "Constant Dollar" methods, the "Dividend Only" retiree doesn't concern himself with fluctuations of his holdings. In addition, the "Dividend Only" retiree doesn't plan to trade any of his holdings. The starting nest egg should be at least 33 times the first year's withdrawal. An example of this method would be an ETF of dividend stocks like DVY. The current yield is around 3%. Click HERE. A variation of this method with bonds added to the portfolio is discussed in post #9 below. Fixed Income Only I doubt many readers are capable of employing this withdrawal method. The starting nest egg should be at least 35 to 40 times the first year's withdrawal. If you are using this method, you are in a most enviable position of not having to rely on stocks (and their accompanying volatility) to maintain your lifestyle. Preparing for Retirement Variable Withdrawals in Retirement
Retirement Savings: Choosing a Withdrawal Rate That Is Sustainable
Determining Withdrawal Rates Using Historical Data (pdf) Asset Allocation for a Lifetime (pdf) Conserving Client Portfolios During Retirement, Part III (pdf) How to Prepare for Retirement Investing During Retirement (pdf) How Much Money Can You Prudently Take Out of Your Investments in Retirement? T. Rowe Price Newsletter (pdf) Will you run out of money? Reality Retirement Planning: A New Paradigm for an Old Science (pdf) Are you saving too much for retirement? Retirement Income: Working Toward a 5 Percent Solution Conserving Client Portfolios During Retirement, Part IV (pdf) Sensible Withdrawals Planners Demand More from Retirement Planning Software (pdf) Social Security as Fixed Income Retire Early Home Page ByLo.org MSN: Escape the Rat Race Retirement Distribution Calculator FIRECalc Monte Carlo Retirement Calculator Max Rate Withdrawal Spreadsheet (xls) Live It Up Without Outliving Your Money! Getting the Most From Your Investments in Retirement by Paul Merriman Yes, You Can Still Retire Comfortably! by Ben Stein Work Less, Live More: The Way to Semi-Retirement by Bob Clyatt The Grangaard Strategy: Invest Right During Retirement by Paul Grangaard Buckets of Money: How to Retire in Comfort and Safety by Ray Lucia Note: These books are only for suggested reading. I found they contained some useful material. But as you can see from the plethora of articles, there is quite a variety of strategies to invest during retirement. 8. Bob tar42| 08-24-05 | 12:16 AM I can't thank you enough for all the links, but it will take me weeks to read all of them. Tim 9. You're welcome, Tim Bob| 08-24-05 | 12:30 AM Take your time. It took me weeks ( months? ) to find them ;~) Bob 16. Bob heirhead| 09-22-05 | 01:14 PM This is really a nice piece of work. Would you be kind enough to highlight what you consider the better of the articles? It's all kind of mind-numbing, you know. Thanks, another Bob 17. Bob #16 Bob| 09-22-05 | 02:45 PM Sure, let's see if I can cut to the quick. The bottom line is that the academic studies show withdrawal rates from a balanced portfolio are in the range of 4% on the conservative end to 6% on the aggressive end. This can be demonstrated with historical data using these two calculators I list in post #4: FIRECalc Max Rate Withdrawal Spreadsheet (xls) And this article . . . Make Sure Your Money Lasts . . . sumarizes the debate between the two ends of the withdrawal rate range. This article . . . Reality Retirement Planning: A New Paradigm for an Old Science (pdf) . . . challenges the notion for using traditional inflation adjustments as retirees move into their mid-stage and late-stages of retirement. The author argues that spending might actually decrease and therefore the traditional ways of looking at retirement planning could be modified. (My own view is best to err on the conservative side. But the author's view may have some merit -- it has been discussed here on the IDR MESSAGE BOARD before.) Those calculators and articles would be the first to start out with. Then if your interest still holds, you can read from top to bottom. Hope this helps! Bob I'm adding this topic because it comes up from time to time. The simple solution to withdrawing money during retirement could be to own one fund like CAIBX. According to THIS LINK, CAIBX has a yield (TTM) currently at 3.73%. (Note the previous time I checked, the yield was 4.06%.) The theory is that a retiree can simply spend the distributions and expect that distribution to rise over time to maintain purchasing power. However, unless one has $1M or more, the downside to buying CAIBX is paying a front-end load. Another downside has to do with putting a substantial or all your money in just one fund and holding it for what could be a 30-year retirement. That's a long time and requires a level of trust and confidence that the fund will perform as intended. Personally, I would be uncomfortable to have nearly all my retirement eggs in one basket such as CAIBX. As an alternative, I suggested in CONVERSATION 2537 (post #12) a similar portfolio which I named "The Espresso Portfolio": Asset Allocation ( Ticker ) Yield 15% Large Val ( DVY ) 3.06% 15% Small Val ( DSV ) 2.86% 15% Int'l Val ( PID ) 3.01% 15% REITs ( RWR ) 3.81% 40% Bonds ( VBMFX ) 5.17% Currently, the overall yield for The Espresso Portfolio is 3.98%. However, I am not recommending this portfolio, either. Keep in mind that there is no guarantee that the yields for the funds I’ve selected for The Espresso Portfolio will continue in a similar fashion. Nor is there a guarantee for the distributions to grow to keep pace with inflation during a 30-year period that one may spend in retirement. Do your own due diligence. Bob 16. A word of caution regarding fund performance Bob| 02-12-06 | 04:46 PM I know this post might generate some debate. But I feel it is necessary to offer the other side. We've seen the disclaimer "Past performance may not indicate future results". It is commonly applied to stock funds. But the disclaimer applies even more so to bond funds and balanced funds. If you've been analyzing past results for your fund and it contains a healthy allocation devoted to bonds, this warning is for you. For several years now, I have analyzed Ibbotson's data for stocks (S&P 500), bonds (5-year gov.) and cash (90-day T-bills). The past 30 years have been an extraordinary period for bonds. This was the result of the FED's policy's to tame the double-digit inflation of the 1970's. As a result, the added capital gains have boosted the total return to bonds well above their long-term average of 5%. So now that inflation is very low along with bond yields, it is very unlikely that bond funds will enjoy the nice total returns of the previous 30 years. Similarly for balanced funds, the return contributed from bonds could also be lower than in the past. To illustrate my point, I have created this chart: 
I generated that chart using THIS SPREADSHEET I created. Bob |
