In the latest edition of The Plan, Jamie mentioned the 4% rule of thumb for withdrawal rates. To delve a bit deeper, the 4% rule hails from the 1994 Trinity Study which looked at past returns for a “moderate” investment portfolio. This study determined that an initial withdrawal rate of 4%, annually adjusted for inflation, will have an 85% success rate over a 30 year time horizon. In other words, a million dollar portfolio can successfully support initial withdrawals of $40,000 per year.
While the 4% rule provides a good starting point, your actual withdrawal rate should be a function of your goals, time horizon, risk tolerance, and a healthy dose of reality.  I have performed my own Monte Carlo Analysis and enclosed tables from the analysis to help illustrate these principles. This analysis uses more conservative return assumptions to reflect the current lower interest rate environment.

Goals– The goal of the retiree should always be the primary consideration. Some retirees want to pass their wealth on, others just want to make sure they don’t run out of money, and others want to spend their last dollar with their last breath. Only when the goals of the retiree are understood can the appropriate level of risk be taken.

Time Horizon– A 4% withdrawal rate for someone retiring at age 60 who is planning to live to 100 (a 40-year time horizon) results in failure too often to be confident in retirement. On the flip side, a 4% withdrawal rate for a retiree with a 10-year time horizon will be successful but may result in more money at the time of death than is ideal for the retiree’s goals.

Risk Level– Understanding your time horizon and goals can help you decide how much risk is needed to accomplish the desired result, but you also need to make sure to remain consistent with your personal risk tolerance.  Let’s use the enclosed tables to illustrate a retiree with a 30-year time horizon. Assuming 4% withdrawals and a goal to pass wealth on to their heirs the retiree would be best served by an aggressive portfolio (Median portfolio after thirty years of $459k compared to $0 with a conservative portfolio). However, if portfolio fluctuations keep them up at night and they risk not sticking to the plan they would be better off reducing the risk of the portfolio as well as the withdrawal rate. To achieve an 85% chance of success with a conservative portfolio the withdrawal rate would need to be reduced to 3.42%.

Reality– It is rare to find retirees who withdraw the same amount adjusted for inflation each year.  Some years require higher expenditures for vacations, home improvements, etc. By avoiding high withdrawals during bear markets and keeping a watchful eye on your financial plan, we can increase your chances of success and maximize lifetime withdrawals.

In conclusion, there is no one-size-fits-all solution. Customizing your withdrawal rate to your unique situation will increase the odds of accomplishing your goals.


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Fun With The Candidates

by James B. Twining CFP

Sanders likes to Socialize

Cruz the right will tantalize

Webb would like to equalize

Huckabee:  evangelize

Hillary equivocates

While the Donald bloviates

VP Biden contemplates

Perry stumbled in debates

Rand Paul’s for the Constitution

Jindal’s sort of highfalutin

Kasich likes redistribution

Santorum needs your contribution

O’Malley wants more new taxation

Carly wants a Trump castration

Bush is known for his relation

Carson for a separation

Walker won a State election

Marco speaks with great inflection

Chafee knows about rejection

Christie has a big midsection

So right or left or in between

Rich or poor, or fat or lean
Is there a hopeful whom you like?

Or should they all go take a hike?

Read the Whole Autumn 2015