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Article: Withdrawal Policy Statement
Old 06-03-2010, 08:36 PM   #1
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Article: Withdrawal Policy Statement

Do you have a Withdrawal Policy Statement?
I think this article will be accessible for the month of June:
The Withdrawal Policy Statement

In it our friend Guyton discusses some things we've discussed here. He adds a "discretionary fund" of 5% to 10% of your assets to do whatever you want to with, so you don't have to argue about 3.5%, 4% or 4.5% SWR in some years.
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Old 06-03-2010, 08:51 PM   #2
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Anyone who is somewhat familiar with my writings over the years or who has managed to stay awake through one of my talks knows of my belief that we, as a profession, are so much better equipped than we were even a decade ago to navigate the varying depths of the retirement waters in which our clients may find themselves. Simply put, our knowledge, insight, skills, and wisdom have grown significantly. However, so much more is asked of us in the frequency and complexity of the never-ending demands inherent in these matters.
Really, he now knows better how to fleece the shhep?
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Old 06-03-2010, 09:05 PM   #3
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I think the discretionary fund could be a good idea. One could add to it in years when expenditures are not high, and take from it in years when a splurge on something seems like a big deal.

On the other hand, he says it is not an emergency fund but I am not sure I fully understand the difference. I guess the discretionary fund would be for trips and RVs instead of being for necessities during bad times.

Reading the article, I am glad that I do not have a financial planner telling me what to do.
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Old 06-03-2010, 09:17 PM   #4
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Maybe it's a bucket?
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Old 06-03-2010, 09:21 PM   #5
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Maybe it's a bucket?
I guess? It's not clear to me whether or not one is supposed to replenish the discretionary fund. I wouldn't feel OK with it unless I replenished it as soon as I reasonably could after using it.

On the other hand, it could be useful for those who want to spend a LOT during the first couple of years after retirement, and then settle down to an SWR after the "party" is over.

Or suppose my daughter's wedding was a few years from now instead of last year. I would probably just not consider the money that I had set aside for that, as part of my portfolio for SWR purposes. But he does, and just labels it a discretionary fund.
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Old 06-03-2010, 09:41 PM   #6
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On the other hand, it could be useful for those who want to spend a LOT during the first couple of years after retirement, and then settle down to an SWR after the "party" is over.
I put aside a $40k "cash bucket" / "discretionary spending pot", outside of the RE account that I calculate the SWR on. That bucket is exactly for that first few "party" years

We will either top it up or downsize the parties depending on how well we do over the next few years.
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Old 06-04-2010, 12:37 AM   #7
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He adds a "discretionary fund" of 5% to 10% of your assets to do whatever you want to with, so you don't have to argue about 3.5%, 4% or 4.5% SWR in some years.
People will think it's such a good idea that they'll do it every year...
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Old 06-04-2010, 02:09 AM   #8
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People will think it's such a good idea that they'll do it every year...
As long as their IPS covers it. And they stay within the 4% +/- SWR. After all TANSTAFL still applies.

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Old 06-04-2010, 04:40 AM   #9
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Wise cracks aside... Guyton has authored some good papers and thought provoking articles.

The discretionary fund sounds like an idea of how to partition certain monies.... set boundaries for management purposes.

IMO - A written withdrawal policy is a good idea. It should help one to refine and articulate their approach.

If a portfolio is involved (which represents a major portion of retirement income) and a retiree cannot describe their approach for managing the portfolio and withdrawal (good times and bad)... they will probably be given to ad hoc decisions bounded by no guide and either let fear or unrealistic optimism take charge.

Of course... this is complicated stuff and I suspect that most people do not understand how it works (or based on the research of the past... how it is likely to work). Realistic risk management is part science and part art (judgment)!
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Old 06-04-2010, 07:31 AM   #10
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...so you don't have to argue about 3.5%, 4% or 4.5% SWR in some years.
Heck, we're well in excess of 4% but we don't worry about it.

4% (or any other number) on an individual year's forecast means very little. That assumption is made thinking you retire on a specific date, and all retirement assets/income sources are available at the same time.

I know that's not the fact in my/DW's case, and I would say it probably is not the norm for a lot of other folks (no, we're not a "special case").

While our forecast (via FIDO's RIP program) shows that we exceed 4% (up to 10% on some years), we also show that at age 70 (less than eight years) when all our income sources are "on-line", our annual withdrawl rate drops to .98% (yes, that's less than 1%, even with our early years "excessive withdrawls") and goes up to 2.82% at age 100, at our end of plan.

So we spend more than suggested in the early years, and leave much more than expected to charity in the later years.

Does it really matter what an arbitrary withdrawal rate means in early retirement, when looking at the long term?....
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Old 06-04-2010, 07:45 AM   #11
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There is another article, in the same issue, on a subject that pops up now and again:

Social Security Reset: When Does It Make Sense?
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Old 06-04-2010, 07:59 AM   #12
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Maybe it's a bucket?
Smells like a bucket, looks like a bucket, feels like a bucket...
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Old 06-04-2010, 08:02 AM   #13
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Does it really matter what an arbitrary withdrawal rate means in early retirement, when looking at the long term?....
I can see your point. For many of us it really doesn't make sense to withdraw the exact same percentage both before and after beginning SS retirement benefits, for example.

Still, the percentages can give us a rough idea of where we stand, and whether or not our annual withdrawal is at realistic or pie-in-the-sky levels.
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Old 06-04-2010, 08:03 AM   #14
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Our plan includes funding what I call a "mad money" fund from unspent withdrawals while times are good. I view it as a source of funds for discretionary spending and for supplementing withdrawals in a prolonged downturn. Gotta get the cash for that new carbon fiber bike somewhere.
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Old 06-04-2010, 08:07 AM   #15
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It's essentially having a "leisure bucket" and rebalancing periodically.
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Old 06-04-2010, 08:20 AM   #16
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There is another article, in the same issue, on a subject that pops up now and again:

Social Security Reset: When Does It Make Sense?
that is a timely and detailed article for our SS thread. thanks!
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Old 06-04-2010, 08:36 AM   #17
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There is another article, in the same issue, on a subject that pops up now and again:

Social Security Reset: When Does It Make Sense?
Another paper on the subject of SS:

http://www.prudential.com/media/mana...Strategies.pdf

Yes, I know this is not a SS thread, but the practices in both these refrerences can affect your rate of withdrawl in retirement...
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Old 06-04-2010, 08:50 AM   #18
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.

Does it really matter what an arbitrary withdrawal rate means in early retirement, when looking at the long term?....

It does if you are counting on the two people survivng . One dies and there goes one SS check and maybe a pension.
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Old 06-04-2010, 09:07 AM   #19
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It does if you are counting on the two people survivng . One dies and there goes one SS check and maybe a pension.
I would suggest it is a situation that is different for every married couple.

For instance, in our case (as I commented before), travel is our largest expense, and has been for many, many years. It's my DW's passion.

I hate to travel (did much, to much of it during my wo*king years).

If she would pass first, my expenses would be greatly reduced. Add to that the reality that I would have her retirement portfolio (as she would have, in my passing), as related to our current rate of spending.

If I would pass first, she would get a much larger SS survivor benefit. While we're both 62, assuming I make it to 70, she would receive a benefit of more than 2.5x her age 62 benefit, along with my portfolio and other investments, along with life insurance I maintain for her benefit assuming I pass first.

She will need that, since I've been responsible all our married life for all household expenses. Her $$ is her $$, to do with as she wishes (that's another thread/story), and in reality, she spends most of it on her passion (no, not me), travel.

I would "lose" two small pensions for her (single-life, at age 65), but she will spend that on travel, anyway.

Maybe we're different (OK, strange ), but in our case, the demise of one would not affect the other - in a financial sense.
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Old 06-04-2010, 09:29 AM   #20
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We set aside an explicit amount for future "big children expenses". That included tuition that we were planning to pay, a wedding, and something more (probably "house warming"). It made me feel good that we could spend from that bucket knowing that it didn't interfere with our long term income.

A withdrawal statement in writing is a good way for paid financial planners to communicate with their clients (and protect themselves). Since most people on this board don't use paid planners, it's more a question of communicating with our spouses. It's probably a good idea to ask the question "Will my spouse be okay with us continuing to withdraw and spend even though the TV is talking about stock market metldowns?" (if that's what you put in your worksheet) or "Will my spouse be okay with us cutting spending when the market goes down?" (if that's what you put in your worksheet).

I can believe that in many cases the best thing a planner can do is get the spouses communicating, but it seems that we shouldn't have to pay a planner to do that for us.
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