Article: Withdrawal Policy Statement

[LOL!]

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.

 

[kumquat]

Your friend is not really your friend.

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?

 

[W2R]

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.

 

[LOL!]

Maybe it's a bucket?

 

[W2R]

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.

 

[Alan]

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.

 

[Nords]

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...

 

[DblDoc]

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.

DD

 

[chinaco]

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)!

 

[rescueme]

...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?....

 

[RonBoyd]

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?

 

[Rich_by_the_Bay]

Maybe it's a bucket?

Smells like a bucket, looks like a bucket, feels like a bucket...

 

[W2R]

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.

 

[donheff]

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.

 

[Rich_by_the_Bay]

It's essentially having a "leisure bucket" and rebalancing periodically.

 

[endthefed]

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!

 

[rescueme]

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/managed/IB-InnovativeStrategies.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...

 

[Moemg]

.

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.

 

[rescueme]

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.

 

[Independent]

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.

 

[Meadbh]

Thanks for the article, which is very useful. I like the idea of a discretionary fund.

 

[Texas Proud]

It's essentially having a "leisure bucket" and rebalancing periodically.

I would not just call it a 'leisure bucket'... sure, it can be... but the way it was written it can be a 'charity bucket', or 'help the worthless kids bucket'... or even 'help the SIL gambling debt bucket'... (I just had to throw that in... )

From what I got out of it... it is what you would call your 'mad money'... something that you can spend on whatever... but when it runs out... you are done... after it is gone... you can then take a look and see 'are we doing so much better in our regular withdrawal that we can move some money over here and be mad again'... but that you could NOT fill it up if it would affect your regular withdrawals...

 

[Moemg]

.

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.

Your wife is a lucky woman ! If anything happens to her I am semi -available and I love to travel especially with that kind of budget !

 

[walkinwood]

Thanks for the link. I have learned a lot from Guyton's past papers - especially his withdrawal rules.

We use an emergency/discretionary fund which was around 5% of our initial portfolio. If you are using a x% of portfolio value withdrawal method, I think an emergency fund is necessary to smooth out your annual budget. It felt good to have it available when the markets tanked in 2008 leading to much lower withdrawal for us in 2009. In the end, we stayed within the 4% withdrawal, but it was good to know we could dip into the emergency fund if it proved impossible. There are obviously, other uses for it too - like large periodic expenses - cars, roofs and the like.

If we tap the emergency fund, I plan to replenish it from annual withdrawals when the portfolio recovers - before giving ourselves a raise.

 

[rescueme]

Your wife is a lucky woman!

After all we've been through together (and still are), I consider myself the "lucky one" ...

She stuck by me through my military service (drafted; served in Nam) when a lot of guys were getting "Dear John" letters and even long periods of separation even before I had my "SEA vacation". And yes, I'm a disabled vet (please, no comments; just trying to show what she has to put up with).

She stuck by me when I spent little time at home due to my traveling for wo*k. Sure, you could say I did it for the "benefit of my family", but I worked with others (both male/female) who's relationships could not stand the pressure, and the travel.

And we still share responsibility for our adult (disabled) "child" - till we're gone.

In our situation, the stats are that 75% (or more) of marriages don't last having a disabled child, with our son's condition. I would like to think in our little world that we are both lucky, and "special"....

Her desire to travel is based (I'm sure) somewhat on the challanges she faces on a day to day basis. It gives her a chance to get away from the day-to-day immediate pressure (even though we do call home daily, regardless of where we are in the world).

We leave for three days in London next week, followed by a Baltic cruise (Denmark, Sweden, Finland, Estonia, Belgium, Russia).

In September, she will go with her "travel buddy" (another women she met last June when we spent the month in Australia, with the same "travel bug") to Canyon Lands/Vegas (no, I don't ask). In November, the two of them are off to a Nile cruise.

Sounds exotic/extravagent? It isn't. Sometimes what you think is "extravagent" is just a coping mechanism for day-to-day reality.

BTW, I'm the lucky one. When she goes to Vegas/Egypt, I get to say home and play with the "puppies" (AKA "my buds")...