Safe withdrawal rates....up to 6.2%

[tkp]

Hi gang,

New poster here. I'm a 52 year old semi-retired financial advisor and I have really enjoyed "lurking" here and reading all of your thoughts/advice while I prepare for my own eventual total retirement.

But I do have one thing I'd like to share.....

As a financial advisor, one of my biggest challenges comes in helping my clients with the all-important question, "how much money do I need to retire?"

For years now, I have stuck pretty much to the tried-and-true "withdraw 4% and adjust for inflation" school of thought. But many times this advice did not really help my clients with their dreams. Either they were desperate to retire NOW, or the 4% was just not enough to allow them to retire comfortably.

So I started looking for alternatives and found something that I think you should be aware of. It is NOT the perfect solution for everyone, but I think it does provide a sound alternative that allows for initial withdrawal rates OF UP TO 6.2% PER YEAR.

I have tried this strategy with a couple of my clients with good success so far. As I said above, it is not for everyone because you must be very disciplined in following a couple of very specific rules in diversifying your portfolio and in making your withdrawals..... And not everyone will have that discipline.

But for those who do (and for those whom a 4% withdrawal rate just won't cut it)....it just might be a way to GET OUT EARLY.

Again, this is not a "fix for everyone" (and I have no business relationship with the creator of this plan, Jonathan Guyton....I've never even met him) but I do think it is something that could potentially help many people in their quest for early financial freedom.

Here's how to find his study (from the Financial Planning Journal, Oct 2004 issue)

Go to www.fpanet.org/journal/articles

Click on past issues

Go to October 2004

Scroll down to "Decision rules and portfolio management for retirees: Is the safe initial withdrawal rate TOO safe?" by Jonathan Guyton

His article is kind of technical, but give it a read and then tell me what you think. (It is NOT an exact duplicate of the conditions normally associated with the "4%" research. But I think his strategy has merit as an alternative.)

Side Note -- Hope to hear from you, but please actually READ the article first....I've noticed that some posters on this Board don't seem do that. They just start spouting off without doing the research

So thanks for allowing me this (somewhat lengthy) posting. This is a great Board that performs a vital service helping us all get ready for the "next chapter" in our lives.

Have a great week!

TKP

 

[REWahoo]

New poster here. I'm a 52 year old semi-retired financial advisor and I have really enjoyed "lurking" here and reading all of your thoughts/advice while I prepare for my own eventual total retirement.

tkp, welcome to the forum.

I'm not sure how much reading and lurking you've done since the Guyton 6.2% withdrawal scheme is well known and has been frequently discussed on the forum. Do a search on "Guyton" and you will bring up numerous threads regarding this SWR strategy.

 

[youbet]

tkp, welcome to the forum.

I'm not sure how much reading and lurking you've done since the Guyton 6.2% withdrawal scheme is well known and has been frequently discussed on the forum. Do a search on "Guyton" and you will bring up numerous threads regarding this SWR strategy.

For example: http://early-retirement.org/forums/index.php?topic=7917.0

 

[REWahoo]

TKP, I didn't intend to come across as disparaging you or the Guyton method, I'm just pointing out it isn't new news. For some people it may be just the ticket to allow them to FIRE sooner, and that's definitely not a bad thing.

 

[Gumby]

Maybe I have misread the article, but it seems to me that a withdrawal scheme which: a) eliminates increases in withdrawals after down years; b) doesn't ever increase withdrawals more than 6% over the prior year regardless of inflation; and c) never allows makes ups for the missed increases, may well leave one eating cat food toward the end of the plan if inflation is high.

 

[FinanceDude]

Hi gang,

New poster here. I'm a 52 year old semi-retired financial advisor and I have really enjoyed "lurking" here and reading all of your thoughts/advice while I prepare for my own eventual total retirement.

But I do have one thing I'd like to share.....

As a financial advisor, one of my biggest challenges comes in helping my clients with the all-important question, "how much money do I need to retire?"

For years now, I have stuck pretty much to the tried-and-true "withdraw 4% and adjust for inflation" school of thought. But many times this advice did not really help my clients with their dreams. Either they were desperate to retire NOW, or the 4% was just not enough to allow them to retire comfortably.

So I started looking for alternatives and found something that I think you should be aware of. It is NOT the perfect solution for everyone, but I think it does provide a sound alternative that allows for initial withdrawal rates OF UP TO 6.2% PER YEAR.

I have tried this strategy with a couple of my clients with good success so far. As I said above, it is not for everyone because you must be very disciplined in following a couple of very specific rules in diversifying your portfolio and in making your withdrawals..... And not everyone will have that discipline.

But for those who do (and for those whom a 4% withdrawal rate just won't cut it)....it just might be a way to GET OUT EARLY.

Again, this is not a "fix for everyone" (and I have no business relationship with the creator of this plan, Jonathan Guyton....I've never even met him) but I do think it is something that could potentially help many people in their quest for early financial freedom.

Here's how to find his study (from the Financial Planning Journal, Oct 2004 issue)

Go to www.fpanet.org/journal/articles

Click on past issues

Go to October 2004

Scroll down to "Decision rules and portfolio management for retirees: Is the safe initial withdrawal rate TOO safe?" by Jonathan Guyton

His article is kind of technical, but give it a read and then tell me what you think. (It is NOT an exact duplicate of the conditions normally associated with the "4%" research. But I think his strategy has merit as an alternative.)

Side Note -- Hope to hear from you, but please actually READ the article first....I've noticed that some posters on this Board don't seem do that. They just start spouting off without doing the research

So thanks for allowing me this (somewhat lengthy) posting. This is a great Board that performs a vital service helping us all get ready for the "next chapter" in our lives.

Have a great week!

TKP

Welcome! I am also an advisor, but am not semi-retired yet. I too have read Guyton in the past, and I think it makes some empirical sense. One of the unfortunate parts of our jobs is to be the "reality check" regarding retirement. I suppose an "ideal" SWR would be about 2-3% a year. However, most folks, even our clients can't make that work........

I USED to think that 6-7% SWR% was a NO-BRAINER. However, I have changed my thinking in the past 5 years or so to closer to 4-5%............

Good to have you around...........

 

[cute fuzzy bunny]

A lot of these schemes look great and work well for 20 years.

Not so hot for 40-50 years though.

 

[rmark]

Guyton "discovered" that the 1973 - 2003 period began with a high expected return which became a high realized return as bond rates fell, providing over 4% withdrawals if you maintained a high stock allocation. Not really a suprising finding.
Once you step outside that time period, you're back to 3 - 4%.

My opinion, which may only be worth what you're paying for it.

 

[teejayevans]

I have tried this strategy with a couple of my clients with good success so far.

I rather not be "trying a new strategy" when it comes to my retirement,
personally I'm going to go with 3%, because that's all I need.
Tom

 

[cute fuzzy bunny]

Another commentary on "backtested systems"...cuz I havent used it in a while!

A group of scientists with a theory went back over a period consisting of the last six and a half years.

At every measuring point, they found that George Bush was president, that he was alive, and that he was generally healthy.

The determination from this study is that George Bush will always be president, will live forever, and never get sick.

Invest accordingly

 

[renferme]

what does Firecalc say about the 6.2% withdrawal?
I'll bet that it doesn't like it.

.
What if the person retires and it's year 2000 all over again?

 

[sgeeeee]

There have been lots of people who have developed spending models other than the pure inflation driven model from the original Trinity Study. They all show the same thing: Control of your own spending is one of the most powerful weapons in your retirement investment arsenal. I still think it makes more sense to divide your spending into required and discretionary parts. The required part of your spending is anything you think you have to have to feel comfortable in retirement. The discretionary are the things that you could do without from time to time when the markets are treating your portfolio badly. Once you do that, you can easily use FIRECalc to explore higher SWRs.

http://early-retirement.org/forums/index.php?topic=2048.0

http://early-retirement.org/forums/index.php?topic=6589.msg117688#msg117688

This technique guarantees you don't eat cat food during the simulation period and allows you to splurge significantly when your portfolio has done very well.

 

[Lsbcal]

I'm not great at statistical calculations but the Guyton study still smells to me like data mining. How many "rules" were thrown at the data before a set of rules were shown to give good results? Were the results tested on an out of sample data group?

Les

 

[youbet]

The required part of your spending is anything you think you have to have to feel comfortable in retirement. The discretionary are the things that you could do without from time to time when the markets are treating your portfolio badly.

Excellent point, but let me add this additional thought.

The required part of a RE budget, depending on the individual, may include more that just life's basics. The portion of a RE budget that is discretionary will vary from person to person. For example, one individual might decide that if he/she couldn't afford the extensive international travel they've been procrastinating all their lives, they wouldn't RE yet. So, that travel should be in the required portion of the budget. For another individual, any travel at all might well be in the discretionary portion of the budget. Categorizing budget items as required or discretionary will require some thought and understanding of what's important to you and what you're willing to sacrifice to conclude your career early.

Also note, that if you don't RE until your mid-50's or later, time becomes more critical. For example, having to eliminate activities that are physically demanding due to portfolio performance issues when you're say, 59, might mean never doing these things if your physical vigor detiorates before your portfolio recovers several years down the road.

 

[Gone4Good]

In general I think Guyton added something important by introducing decision rules governing when someone should reduce, or increase, their spending. And I think he rightly concludes that such decision rules change the question from "what is the probability I will run out of money?" to "what is the probability I will be able to maintain my standard of living?"

But there is no such thing as a free lunch. Higher initial withdrawal rates coupled with "Capital Preservation Rules" increases the likelihood that the retiree will need to reduce spending in the future. When used carefully, this trade off can increase the retiree's expected NPV of spending without increasing his probability of portfolio failure. But trouble looms when a retiree uses the higher withdrawal rate allowed by CPR assumptions to meeting necessary spending.

 

[2B]

In general I think Guyton added something important by introducing decision rules governing when someone should reduce, or increase, their spending.

I agree. Guyton proposes a method to address changes in portfolio value and withdrawls. Someone did an analysis that showed in a worse case scenario the Guyton withdrawls would fall by 50%. Nothing was ever posted about a "best case" scenario.

Personally, I believe in Bernicke and the lower spending as we age.

Good luck with all of the options. You can wait until every possilbe contincency if provided for or you can retire today. You pay for your ticket and you take your chances.