Apologies in advance for this question.
In FICalc, under “Withdrawal Strategy”, which strategy is considered the most conservative?
Thanks!
No need to apologize for a question. I love questions!
In my analysis I don't consider any one withdrawal strategy to be the most conservative. Here's how I would approach your question, though.
First, I would ignore the strategies under "Maximize spend." As their name implies, these strategies aim to allow you to spend as much as possible. In fact, they draw down your portfolio to $0 in the final year, by design. I don't consider any of these to be conservative. "1/N" has the same behavior so we can ignore that one, too.
In terms of the remaining strategies, they share the similarity of preserving your wealth to some degree, and most can be made as conservative as you desire by reducing the amount that they withdraw.
As an example, what would you consider to be more conservative, a 1% Constant Dollar strategy of a 1% Percent of Portfolio? These are both extremely conservative but they still behave differently in different situations.
Most strategies can be configured to be similarly conservative. Here are just a few examples of how some strategies can be made more conservative:
Constant Dollar. choose an initial withdrawal that is a smaller % of your portfolio. I regularly see folks refer to <= 3.5% withdrawal rates as being on the conservative side.
Percent of Portfolio. Same as the above. However, I don't consider this to be a very high-quality withdrawal strategy due to the extreme variations in available spend each year.
Endowment Strategy. This was designed to be conservative while minimizing year-over-year variations as it was a strategy used at Yale to determine the spending of their endowment. FI Calc doesn't currently expose the "knobs" to make it even more conservative, however.
Guyton-Klinger. This one is complex, but you can tweak the parameters to make it behave more conservatively (i.e., increase the withdrawal less frequently and by a smaller amount).
If I
had to give an answer as to what strategy is the absolute most conservative, I guess I'd say none of them. The absolute most conservative plan is to withdraw $0 a year and to keep generating income to cover your spending
(but of course, that isn't very useful).
I generally think of the "longevity" strategies as having two qualities:
(1) initial withdrawal rate. How much it withdraws in the first year
(2) variation behavior/strength. How drastically it changes that withdrawal year-over-year, depending on market conditions.
In this light, Constant Dollar and Percent of Portfolio are identical in terms of (1), as you can choose any value for the initial withdrawal. But for (2) they are opposites: Constant Dollar doesn't change at all and Percent of Portfolio exactly reflects the change in your portfolio.
Most other strategies give you some control over (1) and then have slightly different behaviors for (2).
I know this is a long reply, but I hope it's helpful!
