Hi Guys,
I don't remember if Ted referenced this Morningstar article. If so, it is worthy of a repeat exposure since it focuses on an issue that is ultimately faced by all retirees. What is a safe retirement drawdown plan? Here is the Link to the article:
http://news.morningstar.com/articlenet/article.aspx?id=774651#.WAYy8xpbGvo.twitterJohn Rekenthaler writes many stimulating articles that address pertinent retirement issues. Proably none is more critical than retirement portfolio survival under withdrawal conditions. One common assertion is that a 4% annual drawdown rate that is adjusted for inflation generates a high portfolio survival likelihood for a 30 year period. That finding is the end product from countless Monte Carlo computer simulations. Among the financial community, the 4% rule has become accepted wisdom.
But like all accepted wisdom, it must be applied with caution. Exceptions exist, and Rekenthaler identfied some pitfalls of being too rigid and too formulaic. I agreed with much of what he said, but I do have some reservations with regard to his approach.
For example, he extended the database examined from 1926 to 1900. Sure that gives more data points, but I believe that's in the wrong direction in terms of giving a more representative insight into likely future conditions. Far too much has changed. I would do an analysis using data from several timeframes starting after World War II.
I also believe that Rekenthaler overemphasized the significance of foreign market performance. The US returns are different because our economy is fundamentally different from the foreign ones; it is more robust, more vibrant, and more flexible. I would never include more than perhaps 25% of my equity positions in foreign countries. Rekenthaler would be far more aggressive and would exceed my comfort zone in the foreign dimension.
In general terms, the 4% rule was extracted from the earlier mentioned Monte Carlo studies. One shortcoming of many of these studies is that they lacked the capability to adjust the drawdowns if the marketplace turned ugly and the portfolio became dangerously close to extinction. Early on I recognized that a retiree would spot that danger and adjust accordingly.
In my own Monte Carlo code, I postulated that the retiree would cutback his drawdown schedule by 5% annually if the equity markets produced negative outputs for 3 consecutive years. That doable adjustment reduced portfolio failure by half. Other saving options exist. I completely agree with Rekenthaler that flexibility is a needed requisite for retirement success.
Best Regards.
Comments
My method is very simple, I take to cash reserves up to 1% of my portfolio's quarters ending value not counting its cash position since cash currently offers little return. When I was receiving an annual yield in the four to five percent range for cash I included the cash position years ago, when I managed my parents affairs, but not presently.
So, as the portfolio and it's invested positons grow in value over time so does the allowable quarterly distribution and in major market declines the distribution allowance will decline and at times could be foregone in extreme market down turns. I also have a policy not to take more than one half of what has been earned over a five year rolling period. So, to take it so-to-speak I have to earn it through investment activity. In some years I may make more than I take and other years I might take more than have earned; but, overall no more than one half of the five year rolling average will allow for. Thus, it is important to build cash reserves that money can be drawn from when investment activity will not provide funding for good living and enjoyment. However, I can spend principal for health and welfare, if necessary; but, not for good living and enjoyment.
If I have a flat or negative five year return period then it will be on some days tube steak, cold slaw along with pork & beans for me. Retirement will suck; but, life will continue as I was brought up not to spend more than one's means will allow for.
This works for me because I can throttle my activities along with a good bit of my spending where others in retirement might not be able to.
Derf
http://paulmerriman.com/retirement-distributions-2016/
Click Best Advice....then Retirement distributions 2016.
You wonder how the 60/40 balanced approach will perform if this 35 year bull market in bonds suddenly reverses in dribs and drabs every day for the next 15 years compared to all other options.
Derf