Retirement income planning.

Retirement income planning is an incredibly important and fairly complex topic within integrated planning and investing. My retirement income strategy starts with getting a clear understanding of both your core and discretionary spending needs. Once we know how much you want to spend, we can get a sense of how much you will need to retire, with a high degree of confidence that you won't be alive and broke (not good). As your retirement trek evolves, and the (inevitable) unpredictable happens; volatile markets or unexpected health care expenses -- I adjust with you. We discuss how much your spending and withdrawing, to guide you on steps to make corrective actions if needed, and get back on trail. A strong retirement income strategy integrates tax, insurance, and estate planning guidance (with the help of our subject matter experts or yours).

    How much can I safely withdrawal from my portfolio?

    A study by Bengen (1994) introduces the concept of the 4% rule for retirement withdrawals. He defined the sustainable spending rate as the percentage of retirement assets that can be withdrawn, with this amount being adjusted for inflation in subsequent years, such that the retirement portfolio is not depleted for (at least) 30 years. Begen found that a 4% initial spending rate would have been sustainable in the worst-case scenarios from US historical data over rolling 30-year periods with a stock allocation of between 50 and 75%.

    In an article by Jonathan T Guyton, CFP® and William J. Klinger (2006) they crafted decision rules for portfolio withdrawals and demonstrated that using a decision-making framework for how to increase, freeze or even cut withdrawals, can greatly improve the success of an initial withdrawal rate and a retirement income sustainability plan. These decision rules defined how assets were to be withdrawn each year and with adjustments made in periods of high inflation and negative portfolio returns and showed that using rules to modify withdrawals can result in significantly higher total withdrawals over the life of the retiree.

    As of April, 2017 research by Wade Pfau, CFP® suggests that 4.4% is the current safe withdrawal rate, if the retiree is willing to take a moderate level of risk (50% stocks) and implement these decision rules. Much higher than the 2.8% withdrawal rate if a retiree is planning a static, inflation adjusted approach (no withdrawal rules). Want to know how to spend more safely in retirement? This is it.

    Using decision rules and implementing a dynamic approach to how much you withdrawal from your investment portfolio may dramatically increase a retiree's income over their lifetime, while still planning for a very high probability of portfolio sustainability. The trade off becomes an increase in the chance a withdrawal may need to be cut down the road, depending on markets, and a decrease in the expected value of any planned inheritance (remember, you're spending more). Retirees that want (or need) to maximize the income they generate from their investment portfolio should strongly consider a dynamic approach to withdrawals. I can help you craft a bespoke plan based on both your core and discretionary spending needs. 

    What are the withdrawal rules?

    1. Inflation: annual withdrawals are increased by inflation (CPI), except when the withdrawal rule freezes an increase.

    2. Withdrawal: withdrawals increase by the inflation rule but there is no increase following a year where the total portfolio's return is negative, and the withdrawal would be greater than the initial withdrawal rate.

    When do failures in the plan typically happen?

    Failures in retirement income sustainability are most likely to occur when there are terrible investment returns (or very high inflation), early in retirement. To reduce the possibility of failure, a retiree can cut (not simply freeze) withdrawals in certain situations -- the Portfolio Rescue rule.

    The Portfolio Rescue rule. Break in case of emergency. 

    If a current year's withdrawal rate has increased more than 20% above the initial withdrawal rate current years withdrawals are reduced by 10%. For example, if we estimate that a safe withdrawal rate is 4%, and current years withdrawal percentage would be 4.9%, withdrawals would be cut by 10%. The decreased withdrawal becomes the basis for determining next year's withdrawal amount.

    A retiree that is willing and able to use the Portfolio Rescue rule can plan for a higher initial withdrawal, allowing more spending early in retirement and not be overly worried about unusually weak market conditions early in retirement, otherwise known as sequence of return risk.

    The Prosperity rule. When withdrawals are increased. 

    If the retiree's withdrawal rate falls more than 20% below the initial, withdrawals are increased by 10%, which now becomes the basis for determining the next year's withdrawals. 

    How should the account be managed? 

    It's our goal to manage low cost, broadly-diversified, global portfolios, rebalanced to stay on target while looking for opportunities for tax loss selling. The studies referenced earlier typically use allocations between 50-65% in stocks and often my recommendations are consistent with this research.


    Rebalancing the portfolio ensures the investor will be buying equities when stocks are down -- selling fixed income and cash to purchase more stocks -- allowing the retirees to benefit from any future stock market recovery. An article by Michael Kitces showed that rebalancing is more than a method to keep the portfolio on target, but also a practical approach to generating retirement income from a portfolio.

    Often, we are looking to accomplish two key things when crafting a retirement income strategy for a retiree:

    1. Maximize portfolio withdrawals, especially early in retirement.
    2. Eliminate the possibility of running out of money while avoiding (to the extent possible), any undesired changes to their income stream.

    I believe taking a dynamic approach to portfolio withdrawals can help us accomplish these two objectives with a greater sense of clarity and control. Want to learn what it's like to be a client? Click here to learn more about what you get, what I do, how it works, and how much it costs.