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Optimal sequences of portfolio withdrawals
Old 04-06-2006, 04:15 PM   #1
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Optimal sequences of portfolio withdrawals

FPA's published a study on "Extending Retirement Payouts by Optimizing the Sequence of Withdrawals" with these conclusions:
1. When harvesting money from two assets with the same tax treatment but whose annual rates of return are different, the annual withdrawal should be taken from the lower-performing asset first.
2. When withdrawals are to be taken from a tax-exempt and a tax-deferred account, the sequence of withdrawals is immaterial. That is, the shortfall risk remains unaffected by the order of withdrawals as long as both accounts grow tax-deferred at the same rate of return.
3. When withdrawals are to be taken from a tax-deferred account and a taxable account, the optimal withdrawal strategy depends on the expected rates of return of the individual assets in these accounts. Withdrawals should be made first from the account with the lower expected (post-tax) rate of return. When making withdrawals, it is not true that the tax-deferred account should always be left for last.
4. Owners of Roth portfolios can potentially extend the withdrawal process by simultaneously withdrawing from the Roth and from a tax-deferred account.
5. Perhaps the lesson to be learned is that the "obvious" answer is often not the correct one. The advantages that are presumed of tax-deferred and tax-exempt accounts during the accumulation phase do not necessarily carry over into the withdrawal phase.
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Re: Optimal sequences of portfolio withdrawals
Old 04-06-2006, 08:46 PM   #2
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Re: Optimal sequences of portfolio withdrawals

"Perhaps the lesson to be learned is that the "obvious" answer is often not the correct one."* Seems to me the results ARE obvious.

The majority of the conclusions rest on taking early from lower yielding assets.* This does, of course, increase the average yield over time and as we certainly ought to expect, a higher yielding portfolio would (other things being equal) provide greater pay-out.

The matter of Roth vs. tax deferred accounts simply highlights the ability to take advantage of the progressive nature of the tax code by always assuring that one takes advantage of the lower bracket(s) -- this too seems obvious and has been often mentioned on these boards. (see reply #2 and others to the post "is this a good strategy".

In short, it is an interesting read, but there's nothing new here.
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Re: Optimal sequences of portfolio withdrawals
Old 04-06-2006, 08:53 PM   #3
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Re: Optimal sequences of portfolio withdrawals

Quote:
Originally Posted by d
"Perhaps the lesson to be learned is that the "obvious" answer is often not the correct one." Seems to me the results ARE obvious.

The majority of the conclusions rest on taking early from lower yielding assets. This does, of course, increase the average yield over time and as we certainly ought to expect, a higher yielding portfolio would (other things being equal) provide greater pay-out.

The matter of Roth vs. tax deferred accounts simply highlights the ability to take advantage of the progressive nature of the tax code by always assuring that one takes advantage of the lower bracket(s) -- this too seems obvious and has been often mentioned on these boards. (see reply #2 and others to the post "is this a good strategy".

In short, it is an interesting read, but there's nothing new here.
I agree completely, sell the investments that perform the worst. The problem with the analysis is that they don't rebalance.
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Re: Optimal sequences of portfolio withdrawals
Old 04-06-2006, 10:50 PM   #4
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Re: Optimal sequences of portfolio withdrawals

I play around with the ORP calculator a lot - which among other things atempts to show taxes and sequence of withdrawals among taxible, trad IRA, and Roth.

Depending on your inputs - the results can be - very interesting. For me - changing the end point - 1 mil vs 0 $ at croak time - actuary no or your own - really changes results - at least in my case with my other inputs.

heh heh heh heh - loads of fun
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Re: Optimal sequences of portfolio withdrawals
Old 04-07-2006, 10:27 AM   #5
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Re: Optimal sequences of portfolio withdrawals

Not only do they not rebalance, but they use annualized returns which ignores volatility and its effect on year end balances over the life of the withdrawals. And inflation adjustments are ignored as are RMD requirements. Pretty useless study for application in the real world.
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Re: Optimal sequences of portfolio withdrawals
Old 04-07-2006, 07:46 PM   #6
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Re: Optimal sequences of portfolio withdrawals

Quote:
it is clearly better to take distributions from the asset that has the lower expected return
I see.* So as soon as I can figure out which of my assets is going to perform the worst, I should sell it.* Brilliant.

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Re: Optimal sequences of portfolio withdrawals
Old 04-07-2006, 08:16 PM   #7
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Re: Optimal sequences of portfolio withdrawals

Quote:
Originally Posted by 3 Yrs to Go
I see.* So as soon as I can figure out which of my assets is going to perform the worst, I should sell it.* Brilliant.
More brilliant still ... by harvesting the lower yielding asset first, the authors are increasing the equity portion to 100% as the owner ages! !! !!!
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