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Variable Withdrawal Strategies
Old 03-11-2007, 04:22 AM   #1
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Variable Withdrawal Strategies

Has anyone taken a serious look at the Hybrid Withdrawal Strategies listed at Bob's FInanacial website. They are variaation's on the Constant $ + Constant % withdrawal models.

They appear to be geared toward taking some extra in the good years and getting conservative in lean years.

Please comment on the approaches

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Re: Variable Withdrawal Strategies
Old 03-11-2007, 01:05 PM   #2
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Re: Variable Withdrawal Strategies

I haven't studied each of these strategies but have done my own modeling around variations of Guyton's Capital Preservation and Prosperity Rules.

I look at these variable withdrawal strategies a bit differently then how they are often advertised. Rather than trying to maximize my initial WR, I look at the severity of potential standard of living decreases required to keep a portfolio solvent over an extremely long retirement period (60 years in my case). What I've found is that the worst case scenarios can be quite severe requiring a 40-50% reduction in real spending assuming a 4% initial WR. It goes without saying that lower initial WRs help moderate the magnitude of worst case spending cuts. My own personal opinion based on the modeling I've done is that 4% is too high for very long retirement plans relying entirely on an investment portfolio.

But there is an interesting trade off here. Lower initial WR rates result in a lower initial standard of living with a higher degree of certainty. Higher initial WR rates result in a higher initial standard of living with a lower degree of certainty. At some point, though, I think you get diminishing returns by lowering the initial WR. That is to say, what you gain in certainty is outweighed by the lower standard of living (assuming you've planned appropriately and have the flexibility to make the needed spending reductions if the worst case arises). For me that inflection point is an initial WR around 3%.

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Re: Variable Withdrawal Strategies
Old 03-11-2007, 01:17 PM   #3
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Re: Variable Withdrawal Strategies

Originally Posted by 3 Yrs to Go
For me that inflection point is an initial WR around 3%.
Years ago......before long ago I did the work in Visicalc on an Apple II!!....... I determined that the amount I could safely withdraw from a portfolio to cover a perpetual retirement was 3%. I wish I still had those spreadsheets!

Regardless, I agree, a person with no other income sources than their portfolio, not wanting to do part time work, not expected an inheritance, etc., would be wise to consider accumulating a portfolio that supports a less than 4% WR for a lengthly retirement.
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