withdrawal strategies

Investing Strategies Retirement Investing
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pertaining to portfolio safe withdrawal rate, who is using the guardrail method?

Anyone does a mix and match of flexible withdrawal strategies?is that advised?

Is withdrawing the minimum you can, always good for your portfolio long term growth?

I see there are methods that draw less in a year of declining portfolio value. Whether forgoing inflation adjustment or reducing pre-decline year withdrawal by a percentage only to re-instate the adjustment or the full annual withdrawal once the portfolio value or market goes back up?
Do they mean that or when the portfolio value returns to the value when it started to drop?
does it mean that in multiple years of decline, you would continue to forego and/or reduce the withdrawal amount each year of the decline?

tj

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Hi thejusticier,

“Is withdrawing the minimum you can, always good for your portfolio long term growth?”

I will say Yes.

If you don’t need/want to spend it, leave it in the portfolio. Let it grow.

The nice part of that is later on, after you have gained some experience with your portfolio, those extra dollars growing over time can give you opportunities for the future.

The other questions all get back to “having a straw stuck into your portfolio and needing to take a sip every month or other defined calendar period.”

Let me say this:

None of these questions have ever crossed my mind since retiring.

I look at expenses and projected expenses and size my cash cushion based on that.

I use 3.8% as an inflation number and I always add just a little to allow for those extra things that normally come along.

Doing a quick calc, our cash cushion for our living expenses at retirement was about 19%-20% of our portfolio size.

Right now, our target cushion size is under 6% of our portfolio size. Our cash position target value is larger!

Does that help you?

Gene
All holdings and some statistics on my Fool profile page
http://my.fool.com/profile/gdett2/info.aspx

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As with most things in life, the answer is a definite maybe.

If you’ve saved to the point where you don’t need your full ‘safe withdrawal rate withdrawal’ or if your return sequence in retirement is such that you build up an early surplus, then yeah — not withdrawing money you don’t need is a perfectly acceptable option.

If, on the other hand, you’re balancing on the knife’s edge and/or have a lousy starting sequence of returns in your early retirement years, then you really don’t have much of a choice, unless you have ways to cut back your lifestyle costs.

Personally, I am still decades away from a traditional retirement age, but given that I write about retirement investing as part of how I make a living, I have done a little bit of thinking about it. My current thinking is that I will have an investment grade bond ladder that aims to cover the basics. The first objective of the rest of my portfolio will be to provide the cash to maintain that bond ladder as the rungs mature. In bad years, I let the bond ladder shrink. In normal years, I replenish the ladder as rungs mature. In great years, I either extend the ladder’s length or its breadth, to provide more flexibility or better coverage.

Anything above and beyond that? Well, that’s where things like splurges come in, or the money to cover above-and-beyond Roth IRA conversions, or gifts, or charitable donations, etc.

What I’ve come to recognize, though, is that the most important key is to keep core costs down, in order to maximize flexibility and ability to adapt.

Regards,
-Chuck
Home Fool

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pertaining to portfolio safe withdrawal rate, who is using the guardrail method?

Anyone does a mix and match of flexible withdrawal strategies?is that advised?

The conundrum the Guyton-Klinger and similar methods is trying to solve is that if you follow the 4% rule in most cases you wind up fabulously wealthy at the end of 30 years. In other words, you could have spent more money. In theory GK and similar methods allow you to safely spend more money.

The problem with things like the Guyton-Klinger method and the 4% rule itself is that they are necessarily backward looking. I’m certain the future will not look like that past. Therefore I personally believe GK and similar imply a granularity and level of confidence that doesn’t actually exist. So, a lot of karate for potentially not much real benefit. Personal opinion, that.

The risk to portfolios is a poor sequence of returns early in the withdrawal period. My personal solution to the too much money problem is to wait ten years and then reassess. If you have a higher value at that time you can reset the WR.

And as Rayvt says, the real solution is to retire with enough money in the first place.

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“In bad years, I let the bond ladder shrink. In normal years, I replenish the ladder as rungs mature.”

so you also do a cushion which is not part of your portfolio? The question always has been when to replenish. It was a great time to do so at the end of 2020 and throughout 2021 as many stocks bounce back hard in a relative short time from the pandemic dip, and maybe that could have generated more than just replenish your bond ladder and given you some $$ for anything extra above your core expenses. Such monies would be taken opportunistically depending on the market conditions and I would not count on that but I would be more atuned if I plan to make big ticket items like extended trips, cars or repair or house remodel, or hopefully in much later years medical expenses but I think maybe I need to put some aside only for that latter one (HSA?). I think the 2020-2021 bounce back can be taken as a lesson but I like to hear more about more people on that.

tj

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"And as Rayvt says, the real solution is to retire with enough money in the first place. "

yes. I have enough with some margin based on my expenses and the guidelines and studies. But I don’t think I have so much money that I don’t need to care about my max safe withdrawal rate or withdrawal pattern would be. I don’t have a pension and other sources of income other than a 401K which I could consider dipping into in 5 years and social security which I intend to take when I am 70yol which is 15 years from now. I want to know how to avoid a bad sequence and have my portfolio rise rather than crash to the ground after a while.

I think being able to delay dipping into my portfolio when the market is bad is a good strategy but there is always to question of when you can do that.

tj

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I think being able to delay dipping into my portfolio when the market is bad is a good strategy but there is always to question of when you can do that.

This problem has been studied and many papers written. The desire is a method to withdraw as much as possible while maintaining a roughly steady consistent income BUT not so much that you run out of money.

The thing you must realize is that you have to be prepared to reduce your withdrawals at some point. Unless, of course, your portfolio is so large that your withdrawals are a very small percentage of it.

Not an easy problem to solve. One of the first things that people think of is some sort of “cash bucket” to draw from if a bear market happens. Simple … and naive—and it doesn’t work.

The method I settled on is Guyton-Klinger.

Here is a pretty good series: The Safe Withdrawal Rate Series
https://earlyretirementnow.com/safe-withdrawal-rate-series/

https://earlyretirementnow.com/2017/02/08/the-ultimate-guide…

“Using Decision Rules to Create Retirement Withdrawal Profiles”
Most of my saved links have undergone link-rot.
Try https://www.b-k-ind.com/rvcc/Experience%20pages/Klinger-Reti…

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I’m coming in late and haven’t read the entire thread, but…

When I was subscribed to Motley Fool’s Rule Your Retirement service I saved this link to an overview of withdrawal strategies.

https://www.fool.com/premium/rule-your-retirement/coverage/1…

And this one gives its own approach, which when I ran it came up with more than 4%.

https://www.financialplanningassociation.org/article/journal…

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pertaining to portfolio safe withdrawal rate, who is using the guardrail method?
Anyone does a mix and match of flexible withdrawal strategies?is that advised?
Is withdrawing the minimum you can, always good for your portfolio long term growth?

I can’t tell you what’s “advised,” but I can tell you what I did and why.

I retired at age 60, and the withdrawal plan has several steps in it due to income needs varying:
-If I live to age 96 like I plan, and my spouse lives a couple years past that, I figure we’ll need “$X” per year. That includes (inflation adjusted) $6000 per person for Medicare and Medigap coverage. That also includes social security based on taking at age 68 for me.
So, my portfolio needs to supply $X per year, which is a 3% withdrawal rate using fairly low returns after inflation (conservative assumption). That portfolio is 80/20 stocks/other.
-From age 60 to 65, my health insurance is costing us over $1,000 per month each. Because I need that money now, I can’t tolerate much volatility, so that extra $12K per year ($24K today’s insurance -$12K for two Medicare/Medigap)is in bonds and non-volatile investments.
-From age 60 to 68, I need to cover the amount that SS will eventually pay, so there’s another large chunk of non-volatile money.

All told, my portfolio (sum of the three pieces discussed) was ~50/50 when both of us retired.
-50% Stocks and things subject to volatility (mainly broad index funds and ETFs, but also SCHD, a couple REITs and a small allocation to a commodity fund. (Although the commodity fund has done well over the last 12 months, I’m way behind where I’d have been if I just stuck it in a stock index fund 15 years ago.)
-50% “low volatility” stuff like bonds, iBonds, cash, an annuity-like investment (can’t deliver negative returns, but upside is capped at a few percent), and an arbitrage fund that’s a little like a juiced cash investment which is the next thing I’ll sell to fund six months of living expenses.

As time was progressing, we lived mostly off the non volatile stuff, so the asset allocation was heading towards 60/40 until stocks dropped.

All this stuff is in a big spreadsheet, so I can test assumptions. For instance, living past age 96 doesn’t move the needle much, but changing the returns-after-inflation really does. So does delaying SS, but of course the downside is getting hit by a truck before taking any and leaving money on the table, but I’m trading that risk to avoid running out of money in my 90s due to permanently reduced SS from taking earlier.

Besides running my spreadsheet, I also used Fidelity’s retirement planner, and had a financial advisor make us a plan (for $1800 one-time fee, IIRC). Since all three methods look good, I feel like the things that are plannable are accounted for.

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Here is a pretty good series: The Safe Withdrawal Rate Series
https://earlyretirementnow.com/safe-withdrawal-rate-series/

I put that guy into the “granularity and level of confidence that doesn’t actually exist” bucket. It has been a while since I looked at his stuff, but I recall at one point there was an exercise where he calculated the SWR to four places past the decimal. No way.

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Rayvt posts,

Here is a pretty good series: The Safe Withdrawal Rate Series
https://earlyretirementnow.com/safe-withdrawal-rate-series/

From the site:

https://earlyretirementnow.com/2018/06/27/ten-things-the-mak…

2: The 4% Rule is likely way too conservative for many early retirees

That’s more of a “feature” of the 4% Rule than a “bug”. If you don’t happen to retire on the eve of the next “Crash of 1029 and the Great Depression”, the 4% rule is very likely to make you wealthy.

Whatever happens during your retirement, be it inflation, health care expenses, or the need to financially bailout your kids or grandkids, having more money makes it easier to deal with.

intercst

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syke6 writes,

Here is a pretty good series: The Safe Withdrawal Rate Series
https://earlyretirementnow.com/safe-withdrawal-rate-series/

I put that guy into the “granularity and level of confidence that doesn’t actually exist” bucket. It has been a while since I looked at his stuff, but I recall at one point there was an exercise where he calculated the SWR to four places past the decimal. No way.

I know. When did they stop teaching “significant digits” in high school?

https://www.mathsisfun.com/definitions/significant-digits.ht…

intercst

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so you also do a cushion which is not part of your portfolio?

I have a three month emergency fund in cash, and I’ve faced enough surprise expenses and seen enough of my investments go sideways that I expect I will attempt to maintain at least that level into and through as much of retirement as I can live independently.

The question always has been when to replenish. It was a great time to do so at the end of 2020 and throughout 2021 as many stocks bounce back hard in a relative short time from the pandemic dip, and maybe that could have generated more than just replenish your bond ladder and given you some $$ for anything extra above your core expenses.

Although I am decades from a standard retirement age, I do already have a bond ladder in place. This is because we have kids starting college soon, and although we’ve been good with money, there is no path that lets us cash flow two simultaneous college tuitions from salary alone. I did take advantage of the strong market in 2020 and 2021 to boost the length of my bond ladder to 7 years, which is the maximum I feel comfortable going to given current inflation and interest rates.

As 2022 started out rough for stocks, I let the bond ladder shrink as bonds matured or were called early. I got really lucky in July, and I saw enough of a recovery to justify replenishing it. I don’t have a hard and fast rule as to when I should, but you do raise a great point that it probably makes sense to have guardrails and/or principles in place in advance of having to make a choice at a tough time. Thank you.

Regards,
-Chuck
Home Fool

14

2: The 4% Rule is likely way too conservative for many early retirees

That’s more of a “feature” of the 4% Rule than a “bug”. If you don’t happen to retire on the eve of the next “Crash of 1029 and the Great Depression”, the 4% rule is very likely to make you wealthy.

In fact we retired late 2006, just in time to get hit in the face with the 2008/2009 crash. Spent a lot of time in 2007 looking at a whole lot of various withdrawal strategies, finally settled on Guyton-Klinger. With the initial target draw (IWR) of 4.5%.

The “Modified Withdrawal Rule” (No increase if the annual portfolio return is NEGATIVE and the raw IR w/d % is more than the IWR) was triggered right away.
Also the “Capital Preservation Rule” (“Ceiling”) (If the W/D% computes as more than 20% above IWR, reduce the W/D $ by 10%. This supercedes MWR, should they occur simultaneously) triggered that year.
MWR has triggered 3 more times, but not the CPR.
The “Prosperity Rule” (“Floor”) (If the W/D% computes as less than 20% below IWR, increase the W/D $ by 10%) has triggered once.

Total withdrawals have been 1/2 the initial starting portfolio value, and the current value is 1.5 times the initial value.

I ceased withdrawing all of the scheduled withdrawal amount a couple of years ago, because that amount was much more than we need. The withdrawals include about $300K that we spend on travel & cruises – a luxury that could have easily been skipped if money was tight. (Still looking for another deal like that 20 day Sydney to San Diego cruise (including air fare) we snagged in 2008 for $2000 each. Heck, boarding the dogs cost us another $1000.)

So, yeah, okay, Guyton-Klinger worked great for us, even when starting out with a bad Sequence of Returns hit. It passed the stress test with flying colors.

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"As 2022 started out rough for stocks, I let the bond ladder shrink as bonds matured or were called early. I got really lucky in July, and I saw enough of a recovery to justify replenishing it. I don’t have a hard and fast rule as to when I should, but you do raise a great point that it probably makes sense to have guardrails and/or principles in place in advance of having to make a choice at a tough time. "

yes I see that there are many different paths that one can take throughout their financial life.

I also had to save for my kid’s college fund. The thing is I have had that money for a while already and she hasn’t gone yet. So that sum has been in the bank for many years now. There hasn’t been much interest until now. So I think that decision has been far from the most efficient way of handling that. I let that money sit for so many years while maybe at least some of that could have been invested in better returns instruments.
But I did what I did and I also did that many years before that for the house downpayment when I first purchased. I had that downpayment for a few years before I actually bought a house and put that in the bank.

Now I have about 4 or 5 years of expense+some large ticket items we plan to purchase as I am about to enter retirement. That money also has lingered in bank accounts. I am glad that the interest rates on that is coming up but I am still banking on long term capital growth getting ahead of inflation.
One of the thing I want to feel confident is that I can cover all the basics like medical insurance and basic expenses really well. It is also useful to be able to live on a wide range of expenses and to be able to scale down your expense rapidly. If the money is not there, we can hibernate some of our expenses and when it is there we can use it or keep it to enlarge the cushion for the future.

Though people talk about a saving phase prior to retirement and a consuming phase in retirement, I think there still needs to be a saving tendency all along. I intend to leave some behind but even if I didn’t have that goal, I would not plan on running down my portfolio as close to zero as possible before my passing. I am still and will continue to save and keep my money in the portfolio for the long term as I live my life.

tj

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Rayvt, thanks for the links.

In your case, how often do you re-balance your portfolio to hit a target stock/bond allocation? e.g. 20/80% bond/stock? and does this target varies depending on time periods?
I understand the target allocation to conform with how one is comfortable with volatility or risk and/or with his or her time horizon. Is that right? or is there other considerations for setting the target allocation such as market conditions?

and how much does the exact composition of your stock (e.g. what and how many stocks or a stock index fund?) and bond portion matter for the execution of such guardrail method or any other ‘safe withdrawal’ practices?

tj

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how often do you re-balance your portfolio to hit a target stock/bond allocation?

The typical rebalance is assumed to be annual. Funny thing is, when I did a lot of research & article/paper searches, it came out that the most optimal rebalance interval is something like 4-7 years. Seven years is so long it might as well be an eternity. LOL, as if anybody would remember to set a reminder to go off in 7 years.

In my files I have a number of printouts of papers dated in 2007 talking about this. A key summary is "As these portfolios became increasingly out of balance, little significant change occurred."

One paper is “FPA Journal - Is Rebalancing a Portfolio During Retirement Necessary-57383_1.pdf” (June 2007, pp. 46-57)
In the Executive Summary:
• This paper investigates the strategy of
rebalancing the retirement portfolio
during the withdrawal phase,

• Withdrawing bonds first, over stocks,
performs the best of all the methods,
though the resulting stock-heavy portfolio
may make some investors uneasy.
This method also is most apt to leave a
larger remaining balance at the end of
30 years, while rebalancing leaves the
smallest amount.

As a result of these studies, I do not ever rebalance.
In point of fact, since right now bonds are essentially “return-free risk”, I don’t have any bonds or bond funds.
But most people are not comfortable with this.

how much does the exact composition of your stock (e.g. what and how many stocks or a stock index fund?) and bond portion matter for the execution of such guardrail method or any other ‘safe withdrawal’ practices?

I don’t think the composition matters here. What matters is the method of doing the variable withdrawals.

Further, I suspect that the actual variable method isn’t very important—just so long as it is reasonable and has a clearly defined set of rules. Rules that are easy enough to understand that ordinary people can follow them.

Reading between the lines of the above paper, the best withdrawal method is to use the bonds first and only then start withdrawing from stocks. This reduces to “do not have any bonds at the start of retirement”. IOW, 100% stocks and 0% bonds.
Certainly an unconventional conclusion.

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do you adjust for inflation each year or not?

what inflation rate have you been using and what inflation rate are you using now?

With the guardrail method, you might have a big variance in the amount you can extract each year from your portfolio.

During extremely good years when your withdrawal rate drops much more than the 0.8Xinitial withdrawal rate, could you increase the withdrawal more than the prescribed 10%? Conversely during very bad years, when your withdrawal rate increase much above 1.2* initial withdrawal rate, could you withdraw much less than the 90% or even you would not withdraw anything.

So in good years you would store the excess in cash (amount above what is necessary to strictly cover your expenses), and use accumulated excess cash in bad years?
or would doing that wreck the entire process?

Were you able to do that for some of the years? which ones?

This assumes that you have a big enough nest egg to give you an amount of money each year to cover your expenses and more (excess money for a cushion). By carrying this excess, you may have more flexibility later if you don’t spend it all.

tj

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do you adjust for inflation each year or not?
what inflation rate have you been using and what inflation rate are you using now?

CPI-W. Which is what Social Security Admin uses for COLA.

With the guardrail method, you might have a big variance in the amount you can extract each year from your portfolio.

No. That’s a major point of G-K. That the withdrawals change gradually, not major changes from year to year.

During extremely good years when your withdrawal rate drops much more than the 0.8Xinitial withdrawal rate, could you increase the withdrawal more than the prescribed 10%? Conversely during very bad years, when your withdrawal rate increase much above 1.2* initial withdrawal rate, could you withdraw much less than the 90% or even you would not withdraw anything.

You need to read the paper. All these questions are covered. I think maybe it takes several reading to completely understand it.

  • Decision Rules and Maximum Initial Withdrawal Rates by Jonathan T. Guyton, CFPÂŽ, and William J. Klinger – FPA Journal March 2006
  • Decision Rules and Portfolio Management for Retirees: Is the ‘Safe’ Initial Withdrawal Rate Too Safe? by Jonathan T. Guyton – FPA Journal Oct 2004

So in good years you would store the excess in cash (amount above what is necessary to strictly cover your expenses), and use accumulated excess cash in bad years?
or would doing that wreck the entire process?

This topic is to determine the MAXIMUM amount you can withdraw and still not exhaust the portfolio. Nothing says you can’t withdraw less. Nobody worries about withdrawing less than they need.

This assumes that you have a big enough nest egg to give you an amount of money each year to cover your expenses and more (excess money for a cushion). By carrying this excess, you may have more flexibility later if you don’t spend it all.

Of course. You can carry-over under-withdrawals to future years.
Ex:

  • Year 1 your scheduled draw is $4500/mo, year 2 is $4600.
  • In year 1 you only needed $4400/mo and that’s all you took.
  • In year 2 you can spend the scheduled $4600 + the $100 that you didn’t take in year 1. = $4700/mo

Were you able to do that [withdraw less than scheduled] for some of the years? which ones?

This isn’t about me. this is about the strategy.

==================================

If you really want to get a good understanding of how Guyton-Klinger would work, create a model in a spreadsheet (or on paper by hand). Start off with, say, $1,000,000 in SPY on Jan 1, 2000. Use the actual historical figures for inflation (SSA COLA), SPY annual total return.

You ask: Were you able to do that for some of the years? which ones? The spreadsheet will show you this.

I have my own spreadsheet, but there is probably somewhere on the internet somebody has published one, or perhaps has worked through an example, that you could copy.

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Nothing says you can’t withdraw less. Nobody worries about withdrawing less than they need.

I think you meant “Nobody worries about withdrawing less than they CAN.” Yes, people do worry when their maximum withdrawal is less than they need.

AJ

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