VG: dynamic withdrawal strategies

[Onward]

In our view, flexibility is the word that best describes a prudent spending strategy. Rigid spending rules cannot eliminate investment volatility; they simply push its consequences into the future.

http://www.vanguard.com/pdf/icrmda.pdf?linkLocation=insights_overview​

 

[M Paquette]

Thanks. The '5% ceiling/2.5% floor' model, which looks to limit withdrawal rate changes to +5%/-2.5% reminds me of Bob Clyatt's 95% Rule, with similar results.

 

[Onward]

I'm confused about how they calculate the ceiling and floor. They say

The investor also calculates a “ceiling” and “floor” by applying chosen percentages to the prior year’s spending amount.

But the percentages they use are 5% and 2.5%. Those would seem to apply to total assets, not the prior year's spending amount.

 

[M Paquette]

But the percentages they use are 5% and 2.5%. Those would seem to apply to total assets, not the prior year's spending amount.

I had the same translation problem. Money people trying to write prose. Not so good...

I believe, from the text and the tables, that the spending for the current year is capped at 5% more than the previous year's spending, or 2.5% less than the previous year's spending. For purposes of their success rate calculations, they looked at a 35 year withdrawal period, with the first year's spending set to 4.75% of the initial portfolio value.

 

[fisherman]

Interesting note on page 8 table b.

A conservative allocation 20% stock 80% bonds for a 40 year horizon provides a 85% success rate with a 4.5% initial withdrawal and then using the percent of portfolio with 5% ceiling and 2.5% floor for each year.

If you use this without SS and then lower the withdrawal some when SS kicks in it sounds like a good option without the large market swings.

Am I missing anything?

 

[Gone4Good]

Am I missing anything?

A big one to my mind is some data surrounding the 15% failures. We have 10-yr treasuries currently yielding 3.4% and a total bond market yield of 2.7%. I'd have a hard time implementing a strategy that says I can allocate 80% of my principal to bonds and then take withdrawals 100bp-170bp more than those bonds yield.

 

[W2R]

I just don't feel comfortable withdrawing more than 4%.

Looks like a reasonable approach otherwise, though.

 

[clifp]

A big one to my mind is some data surrounding the 15% failures. We have 10-yr treasuries currently yielding 3.4% and a total bond market yield of 2.7%. I'd have a hard time implementing a strategy that says I can allocate 80% of my principal to bonds and then take withdrawals 100bp-170bp more than those bonds yield.

I agree. It is one thing to withdraw more than current income from portfolio with moderate equity allocation (40-60%), you can always rationalize that next year the market will be back up and that allows me to dip into my principal this year. However with only 20% in equities where is that income going to come from in the future. Interest rates may not be destined to rise in the immediate future, but it hard to imagine racking up any substantial capital gains from bonds in the next couple of years.