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Portfolio Withdrawal Strategies

edited September 8 in Other Investing
"Investors have been conditioned for decades to believe they can withdraw only 4% a year
through a theoretical 30-year retirement, adjusted for inflation."


"But several studies and retirement experts now view 4% as too conservative and inflexible.
J.P. Morgan, in a recent report, recommended about 5%.
David Blanchett, who has a doctorate in personal financial planning and has studied retirement withdrawal rates for years, says 5% 'is a much better starting place, given today’s economic reality and people’s flexibility.'”


"The inventor of the 4% rule agrees.
Retired financial planner Bill Bengen tells Barron’s he is revising his benchmark in an upcoming book,
and that a rate 'very close to 5%' may be warranted."


This article (link below) places too much emphasis on bucket strategies.
While a formal bucket strategy can be beneficial for certain investors, it is not essential.

The "4% rule" is not an ironclad rule - it's only a decent starting point for retirement withdrawal rates.
1) What are your thoughts regarding retirement withdrawal rates of ~5% for the general population?
2) Which withdrawal strategy do you utilize and why:
a) fixed real withdrawal amount (FRWA); b) FRWA which skips inflation adjustment after annual portfolio loss;
c) RMD method using IRS Life Expectancy Tables; d) "guardrails" plan developed by Guyton and Klinger;
e) other strategy.

Portfolio Withdrawal Strategies
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Comments

  • edited September 8
    I think RMDs will require more than 4-5% withdrawal rate for those who are subject to RMDs. But the $$$ can just be reinvested, if desired. If you want to leave some $$$ behind, forget about 4 or 5 or 20%. Make it 3% or lower, if you can manage it. There's no rule about leaving nothing behind, spending down the whole portfolio, eh?
  • A common RMD table starts at 3.77% at 73, is 4.06% at 75, and increases rapidly, 6.25% at 85, 11.24% at 95,..., 50% at 120+ (who is that for?).
    However, portfolio withdrawals should be based on total portfolios, taxable, tax-deferred, tax-free.
  • beebee
    edited September 8
    imageIMG-9370
  • the chart above came from a article listed here.

    50-percent-rule-allan-roth RB
  • A common RMD table starts at 3.77% at 73, is 4.06% at 75, and increases rapidly, 6.25% at 85, 11.24% at 95,..., 50% at 120+ (who is that for?).
    However, portfolio withdrawals should be based on total portfolios, taxable, tax-deferred, tax-free.

    Well, imagine my surprise. Thanks for all the info, and @bee.
  • Who wants to risk 10% chance of having no money?

  • edited September 8
    @bee

    Thanks for the link to the Allan Roth article.
    I've previously read that Harry Markowitz split his contributions 50/50 between stocks and bonds.
    The Father of Modern Portfolio Theory didn't utilize efficient frontier analysis for his own portfolio!
    Markowitz's intention was only to minimize future regret.
  • In general, models like these are helpful to me, but I rarely do exactly what they recommend

    It is difficult I have found to accurately predict what your spending will be in retirement. I ran multiple [plans over the years but the reality in retirement has proven most of them were too high, especially when you look at just the necessities, ie food utilities rent and insurance

    One of the reasons we have adequate savings in retirement is we were rather frugal when we were working. We splured only on the kid's education which paid of. Small house, cheap cars camping vacations mean we don't have to worry about running out of money.

    M only regret about my early financial decisions is not having our retirement accounts 100 % inequities when I was in my 30s and 40s. But I wanted to sleep at night!
  • Who wants to risk 10% chance of having no money?
    And the invers might be, who wants a 90% risk of not enjoying life to its' fullest.

    That said, I personally won't be taking 5% because I don't need to, but the thought of taking 3% sure sounds safer.
  • edited September 8
    "M only regret about my early financial decisions is not having our retirement accounts 100 % inequities when I was in my 30s and 40s. But I wanted to sleep at night!"

    I also was not 100% invested in equities during my 30s and 40s.
    Taking risk tolerance into consideration, it can be beneficial to construct
    a portfolio that an investor is comfortable with to decrease anxiety.
  • MikeM said- "I personally won't be taking 5% because I don't need to, but the thought of taking 3% sure sounds safer."

    And of course the key words there are "because I don't need to". So it's evident that there really is no percentage "rule" that fits everyone. Everyone's portfolio is different and everyone's needs are different. We, for example, have been retired over 20 years, are in our 80's, and have yet to need to take any percent from our portfolio/savings. In fact that has grown significantly since retirement.

    Neither of us came from wealth- I retired as a radio tech and my wife as a teacher. We both were super fortunate to have pensions and SS retirement income. But we began planning for retirement in 1970, and were very careful about expenditures. Being blessed (so far) with good health is a really major factor also.

    To reiterate: everyone's needs are different. There is no one percentage that fits all.

  • Thanks for your comments Old_Joe.
    Your retirement planning yielded excellent results!
    My primary reason for starting this thread was to learn more about various portfolio withdrawal strategies.
    I plan to retire relatively soon and wanted to see how others handled portfolio withdrawals in retirement.
  • edited September 8
    The common withdrawal works for large portfolios or someone with a nice pension that helps cover most/all expenses.
    The other 80+% of the retirees will have a problem.

    The following is easy to implement and you will never run out of money. Suppose you select 4%. Every year on January 1st, look at your portfolio. 4% of that is your max withdrawal.
    If your portfolio is too small your withdrawal would not be enough. That means you need to cut your expenses or keep/start working.
  • edited September 8
    I did not realize that you are supposed to invest 100% of your retirement accounts with equities. I never have. In fact equity %age in my retirement accounts is far lower than in my taxable accounts - not saying that is the right strategy, just stating facts. I could be completely wrong in my approach but my favoring taxable accounts for equity allocation has to do with expected lower tax rates on cap gains vs ordinary income and mutual fund distributions vs ETF distributions. I never had any equity or allocation mutual funds in my taxable accounts. It will be good to start a thread asking forum to share their %age equity in retirement vs taxable accounts.
  • As I mentioned in the most recent thread on this topic, we'll be taking out RMDS when we have to. Our goal is to avoid withdrawals from our taxable investments. I suppose the next step after that would be to realize capital gain and dividend distributions.
  • edited September 8
    "I did not realize that you are supposed to invest 100% of your retirement accounts with equities."

    Some people suggest younger investors (early 20s to early 40s?) could be 100% invested in equities.
    Since their retirement is distant, they would ultimately get compensated for accepting additional risk.
    This of course assumes these investors have the risk tolerance
    necessary to avoid making poor decisions during market downturns.
    I don't believe this suggestion differentiated between taxable, tax-deferred, and tax-exempt accounts.
  • Cash cushions, or emergency funds, are different from investments in those getting-started years.

    It's hard to think about retirement when you're hoarding soda bottles for their deposit value.

    Ahhh, the good old days in San Francisco when a Bohemian life-style was still possible.

    I did end up taking penalties on what little I had in IRA's to help come up with a down payment on a house in Marin. Might be the smartest thing I've ever done with money besides paying cash for used cars.
  • WABAC said, "
    It's hard to think about retirement when you're hoarding soda bottles for their deposit value." Or aluminum cans for scrap.
  • edited September 8
    I would advise younger investors who are dollar averaging in, saving for retirement and still in their 20s and 30s to go 100% equities. Over 40 it becomes less of a ”no brainer” I suppose. My Templeton fee-based advisor put me in a single global fund when I was 23 or 24. While it was an excellent fund and served me well, I’d probably split it into 3 different funds for safety if I had it to do over again. The secret when very young is probably to be so busy with a burgeoning career, growing family, continuing education, new cars, sports etc. that you never think about those investments. The more you think about them the more you begin to worry and possibly get too conservative …

  • edited September 8
    @hank said- "I would advise younger investors who are dollar averaging in, saving for retirement and still in their 20s and 30s to go 100% equities... I’d probably split it into 3 different equity funds for safety if had to do it over."

    And I strongly agree with all of that. I would also add that my preference would be for equity funds that are managed by a group of advisors, such as at American Funds. (But I'm not at all pushing American Funds in any way.) Over the years here at MFO I've seen way too much anguish about funds led by some sort of wizard, who either loses his magic wand, quits to go somewhere else, retires, or dies.
  • Never had to do cans. Didn't have debts. Didn't have kids then. We could usually piece something together between Dickensian Manpower temp work, and theater, art, and museum calls.

    We liked Pepsi in 16 oz bottles. So we would save them up as long as we could before we cashed them in.

    That was a long time ago. I can't remember the last time I had a Pepsi. These days we spend that money going to the municipal gym.



  • Who cares about the 4% "rule" when most bond funds are paying that and more, maybe much more? Just take the bond interest instead of eroding the asset base by selling anything.
  • "I would also add that my preference would be for equity funds that are managed by a group of advisors, such as at American Funds. (But I'm not at all pushing American Funds in any way.) Over the years here at MFO I've seen way too much anguish about funds led by some sort of wizard, who either loses his magic wand, quits to go somewhere else, retires, or dies."

    I've been burned by funds due to various "star manager" issues over the years.
    When selecting actively-managed funds, I now choose funds which have multiple portfolio managers.
  • Low_Tech said:

    Who cares about the 4% "rule" when most bond funds are paying that and more, maybe much more? Just take the bond interest instead of eroding the asset base by selling anything.

    brilliant, really.
    ****************
    I would advise younger investors who are dollar averaging in, saving for retirement and still in their 20s and 30s to go 100% equities. My confirmation bias just got a boost.
    +1.
  • "When selecting actively-managed funds, I now choose funds which have multiple portfolio managers."

    That is what I too have been advocating. But it turns out I have not been eating my own cooking. All my single manager funds are from TRP. I keep an eye out in case manager risk surprise surfaces in these funds. I justified my choice to stay in these funds on the premise that they are from a well known fund complex (not a real safety net though) and the transition is likely going to orderly and other risk controls are likely in place. Strangely, PRCOX, the semi benchmark centric fund, is a multi-manager fund. Go figure.
  • Crash said:

    Low_Tech said:

    Who cares about the 4% "rule" when most bond funds are paying that and more, maybe much more? Just take the bond interest instead of eroding the asset base by selling anything.

    brilliant, really.
    ****************
    Isn't it obvious? I don't get the obsession and wasted "ink" over "buckets", or sticking to some percentage which will be different for everyone, etc.

    My obsession for years was to get a big enough asset base to provide income for retirement (I only have SS, no pensions).

    I was trying to avoid (and did) having an asset base that I would have to sell off for retirement income, and hoping it would last til I croak. But if you need 4% to cover expenses, then back to my original point of just taking bond interest and leaving the base alone.
  • @low_tech
    Who cares about the 4% "rule" when most bond funds are paying that and more, maybe much more? Just take the bond interest instead of eroding the asset base by selling anything.
    Let's test the above. BND(US total bond index) the most recommended bond fund made only 1.6% annually in the last 10 years.
    SPY made "only" 12+%.
    Using PV with 4% withdrawal for 10 years shows that starting with one million ended at $779K(rounding) while SPY ended at 2.23 million.

    Another proof that total return is always the most important aspect of investing. Many investors, especially retirees, also care about risk-adjusted performance.

    https://www.portfoliovisualizer.com/backtest-portfolio?s=y&sl=2yCWNHHnyii8C3LxrBfKrb

  • beebee
    edited September 9
    FD1000 said:

    @low_tech


    Using PV with 4% withdrawal for 10 years shows that starting with one million ended at $779K(rounding) while SPY ended at 2.23 million.

    My Comment:

    PV also provide a inflation adjusted amount:

    $779K = $558K (inflation adjusted)
    $2.23M = $1.6M (inflation adjusted)

    Keep in mind that Inflation plays a silent role in reducing your buying power and your wealth.


    https://www.portfoliovisualizer.com/backtest-portfolio?s=y&sl=2yCWNHHnyii8C3LxrBfKrb

  • edited September 9
    FD1000 said:

    BND(US total bond index) the most recommended bond fund made only 1.6% annually in the last 10 years.

    I’ve done a lot of looking recently at bond funds (investment grade). It’s shocking how poorly they have performed over the past 10 years. I ran comparisons at Fido using CVSIX and LQDH against many bond funds (and also compared results to many bond CEFs). Both are low-volatility arbitrage strategies often viewed as cash substitutes. Interestingly, both have stomped short-term bond funds and ultra-shorts over 10 years as well as just about every other investment grade bond fund. They’ve even managed to outshine Price’s Spectrum Income Fund (RPSIX) which typically allocates 10%+ to equities. I don’t mess with high yield - so don’t know. But as FD says, investment grade bond fund returns have stunk for the past decade.

    To be fair, 2022 was disastrous for bonds / bond funds and does tend to distort their recent performance numbers. Disclosure: I own CVSIX. Have considered owning LQDH.

    @bee - Thanks for the computation & especially for the reminder about inflation. Too many folks I know personally regret not factoring in that second item in their retirement planning. More important than ever due to the miracles of modern medicine and lengthened life-spans.
  • Just as many PV runs for stocks to 2009 looked terrible, so do bond PV runs to 2022.

    Comparisons for money-market and Ultra-ST bonds should be from mid-2022 (i.e. beyond the ZIRP).
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