I just returned from the NAFPA National Conference which was held near Washington, DC. I’m still sorting through all of my session notes and handouts but I wanted to share a great session by Jonathan Guyton, CFP® who reviewed all of the recent research on retirement withdrawal strategies.
· If you want to withdraw a steady amount each year from your portfolio (adjusted for inflation) you can have an initial withdrawal rate of 4-4.5% per year.
· If you are willing to freeze your withdrawal in the year after your portfolio value declines then you can have an initial withdrawal rate of 5-5.5% per year.
· If you are willing to reduce your withdrawal by 10% the year after your portfolio declines then you can have an initial withdrawal rate of 5.5-6.5%.
The most interesting part of the presentation was a “stress test” of a client who retired in 1973 (our current worst case historical scenario). We had a big market decline in 1974 along with high inflation (which according to Guyton’s research is more dangerous to a retirement portfolio than market declines).
In all three cases the client had enough money to last until at least 2009 but in the first couple of cases the ride was very scary and most clients and advisors would likely abandon the policy. The third scenario (which allows for reductions in withdrawals) would be a lot easier to adhere to without the client or advisor having sleepless nights.
Although in the first scenario the withdrawal rate starts out low, the combination of a big market decline in the second year and high inflation mean that the withdrawal rate quickly reaches double digits if the client increases their withdrawals to keep pace with inflation. Although the withdrawal rate rises in the third scenario it is much less dramatic due to the ability to adjust the withdrawals based on the portfolio performance.