retirement withdrawal strategies
TRANSCRIPT
Milwaukee Bogleheads®
A DIY investment group, followers of John Bogle's
Index investing strategies, the Milwaukee local
chapter of Bogleheads.
This presentation was made November 4, 2014
by Bob Schramm of our chapter.
Disclaimer
All examples are for illustration purposes only and
are not investment recommendations.
The views expressed in the presentation, are
those of the presenter, commenters, guests and
participants and may not reflect the views of the
Bogleheads organization.
Use your discretion in using examples presented
here for your own investment purposes.
Retirement Funds:
Will You Still Love Me Tomorrow?
A look at Otar’s Zones and Guyton’s Rules
Robert Schramm
MKE Bogleheads
November 4, 2014
Zone Strategy
1. How much do I want? Called Withdrawal Rate (WR).
2. Mr. Portfolio, How much can you pay? Called Sustainable Withdrawal Rate (SWR).
3. Mr. Insurance, if I give you all my money, How much will you pay me? Called the Annuity Rate (AR).
Full CPI-Indexed Annuity
4.65% x 926,000 = 43,059
3.35% x 926,000 = 31,021
Annuity Rates (AR)
age 60 age 65 age 70
Male 4.65% 5.30% 6.30%
Female 4.25% 4.80% 5.80%
Joint 3.85% 4.30% 5.15%
Sustainable Withdrawal Rates
(SWR)
age 60 age 65 age 70
USA 3.35% 3.70% 4.25%
age 60 age 65 age 70
USA 3.35% 3.70% 4.25%
Annuity Rates (AR)
age 60 age 65 age 70
Male 4.65% 5.30% 6.30%
Female 4.25% 4.80% 5.80%
Joint 3.85% 4.30% 5.15%
5.8% x 385,000 = 223305.80% x 385,000
= 22,330
4.25% x 385,000
= 16,363
Conversion Numbers
% Rate to Multiplier Annuity Rate (AR) to Life Annuity Multiplier (LAM)
AR 5.3% = LAM 20 100% / 5.3% = 20 5.3% x 20 = 106%
Sustainable Withdrawal Rate (SWR) to Sustainable Asset
Multiplier (SAM)
SWR 3.7% = SAM 27 100% / 3.7% = 27 3.7% x 27 = 99.9%
Red Zone Strategies
You must export risk
If Retired: Slow down withdrawals
Cut expenses Part-time work
CPI-indexed Annuity to cover inflation risk
If Working: Delay Retirement A few extra years might be enough to buy
annuity
Decision Rules and Maximum
Initial Withdrawal Rates
By Jonathan T. Guyton, CFP, and William J. Klinger
Cornerstonewealthadvisors.com/files/08-06_Websitearticle.pdf
Guyton Withdrawal Rules
Portfolio Management Rule
Inflation Rule
Withdrawal Rule
Capital Preservation Rule
Prosperity Rule
Guyton Withdrawal Rules
Portfolio Management rules
If an asset class exceeds its target allocation, invest
excess in cash.
Withdraw first from excess equities, then from
excess bonds, then from excess cash.
Do not withdraw equity following a year of declining stock market.
Guyton Withdrawal Rules
Inflation rules
Withdrawals increase by the annual rate of inflation, measured by the CPI, to maintain
purchasing power up to a maximum of 6%.
There is no make-up for a missed increase.
Guyton Withdrawal Rules
Withdrawal rule
Withdrawals increase from year to year in
accordance with the inflation rule, except there is
no increase following a year where the portfolio’s
return is negative and when that year’s withdrawal rate would be greater than the original
withdrawal rate.
There is no makeup for missed increases.
Guyton Withdrawal Rules
Capital Preservation rule
For the first 15 years, reduce
withdrawal rate by 10% if it
would have risen by 20%over initial rate.
Expires 15 years before the
maximum age.
This decreased withdrawal
becomes the basis for the
following year’s withdrawal.
Guyton Withdrawal Rules
Prosperity rule
In years with a withdrawal rate more than 20% below the
initial withdrawal rate, the current year’s withdrawal rate is
increased by 10%.
Other decision rule in effect are applied to this increased
amount.
This increased withdrawal amount becomes the basis for determining the next year’s amount.
Guyton Withdrawal RulesProsperity Rule Example
Year Inflation WR Withdrawal Account Balance
Start 4.00% $ 20,000 $ 500,000
1 3.00% 4.12% $ 20,600
7 3.00% 4.92% $ 24,600 $ 820,000
24600 / 820000 = 3%
4% - 20% = 3.2%
4.92% + 10% = 5.41%
7 new 5.41% $ 27,050
Decision Rule Summary
Condition:
Prior year ‘s return is negative
Current WD rate w/I 20% of initial WD rate
Current WD rate > initial WD by 20%
Current WD rate < initial WD rate by 20%
Action:
Apply Withdrawal Rule
Increase prior year WD by CPI
Apply Capital Preservation Rule
Apply Prosperity Rule
Guyton Withdrawal Rules
Conclusions
Withdrawal rates of 5.2%-5.6% sustainable with 99% confidence with 65% equities.
80% equities provides greater purchasing power with lower success rates.
50% equities drops maximum initial withdrawal rates as low as 4.6%.
Aside: 65yo couple 17.6% probability of 30 years-life expectancy just under 24 years.
http://www.retirementoptimizer.com/ Jim Otar’s site for his
book and sample his retirement program
http://cornerstonewealthadvisors.com/files/08-06_WebsiteArticle.pdf Guyton and Klinger’s decision rules
and withdrawal rates
http://www.forbes.com/sites/lawrencelight/2014/04/24/how-to-withdraw-your-retirement-money/ Article and sample link
to a Withdrawal Policy Statement
http://www.kitces.com/?s=annuities+versus+saf Comparing
annuities with safe withdrawal rates
http://assetbuilder.com/SCOTT_BURNS/HOW_TO_OVERCOME_FEAR_OF_REQUIRED_DISTRIBUTIONS?utm_source=feedburner&utm_medium
=feed&utm_campaign=Feed%3A+Assetbuilder+%28AssetBuilder+Inc.%29 Using RMD’s as a way of annuitizing retirement income.
Links to RMD calculators.
http://www.bogleheads.org/wiki/Required_Minimum_Distribution_vs_annuitization A look at IRA minimum distributions in the light of
annuities.
http://www.bogleheads.org/wiki/Safe_Withdrawal_Rates
Considerations of safe withdrawal rates
http://www.esplanner.com/ Economic security planner from
Lawrence Kotlikoff (Try free version)
http://firecalc.com/ Retirement Calculator