What about this for higher withdrawal rates?

[Roger_R]

Our corporation sponsored a retirement seminar through our credit union today.  The speakers presented three methods of withdrawal from retirement accounts.  The first was to withdraw interest from the principal, the second was a constant withdrawal rate from all investments, and the third was a constant withdrawal but drawing from asset classes having increasing risk over time.  They were obviously pushing this third method as having a probability of sustaining higher withdrawal rates and the figure 6 or 7 percent were tossed about.  

This favored method was simplistically explained as each asset class were a bucket of money.  As you enter retirement you would first spend the bucket of money that was low risk fixed income, then maybe bond funds, then large cap stock funds, and so forth until the final bucket was small cap growth funds.  You would spend each bucket entirely until cashing into the next bucket.  

I talked with one of the presenters afterwards and mentioned a few words like the Trinity Study and reversion to the mean.  His eyes glassed over as if he were recalled to his earlier days selling used cars.  But the intention as I would think of it was obviously to have higher risk/return investments with a larger standard deviation of returns reserved for later retirement only Thus banking on the higher probability of returning to the mean.  And then higher overall returns for the life of the portfolio.  

Make any sense to you folks.

 

[Peter]

One problem I see is that your portfolio becomes more and more volatile as time goes by.

Peter

 

[Jarhead*]

One problem I see is that your portfolio becomes more and more volatile as time goes by.

Peter

Hey Peter:

I (about 8 mos. ago) essentially did what other poster was referring to. I didn't know that it was being recommended by financial folks. Just seemed to make sense to me.
I intend on sticking with the program, as by pushing the higher risk assetts into a longer term, and spending down the low risk portion of portfolio, allows me a cetain feeling of detatchment from the ups and downs of the equity markets.
While your point about the volitility is well taken(regarding the last portion), I feel that by giving that portion of your portfolio time to run, it should lessen the volitilty somewhat. Also, when a portion of the equities side gets ahead of itself, I intend on selling off a portion of it and adding to my "chicken buckets". (I recently did that with some of my Reits).
I mainly changed to this strategy because I would rather spend my time playing golf and fly fishing than
agonizing over the fickleness of the markets.
Whether this strategy is best for the long haul, remains to be seen, but so far, I am happy with the detatchment that it has given me.
Regards, Jarhead

 

[samclem]

Roger_R,

- I don't think it is a good plan--at all. Yes, the longer holding period will tend to produce a more stable average return for the most volatile asset classes, but when you need them you'll still be subject to the wild annual swings if you have no other assets for diversification. Do you really want to be pushing 90 and have all your retirement assets tied up in small growth stocks, biting your nails with every swing of the NASDAQ and hoping your remaining stake won't drop 40% in a single year?? Nope, when you are 90 you don't need to be worried about that--you'll need stable income (provided probably by corp/govt bonds/TIPS) with a small growth component (equities) in case you continue to stay one step ahead of the grim reaper for another decade.

I'd advocate continued rebalancing every year to your target allocations, taking most from the asset classes that have done best (thus exceeding your target %age), with a gradual shift away from the riskiest equities over time.

This subject has received a lot of discussion here, I think the "continued diversification" is the approach most folks recommend.

regards,

samclem

 

[Roger_R]

I am indeed skeptical of this technique, and know it isn't for me. Though I can see some less totalistic version as having some appeal. My problem is probably as samclem said,

Do you really want to be pushing 90 and have all your retirement assets tied up in small growth stocks, biting your nails with every swing of the NASDAQ and hoping your remaining stake won't drop 40% in a single year??

I am indeed more of a traditionalist for withdrawal rates. As for any other financial institutions supporting this, I did run across this brief treatise http://www.isgplanning.com/Trinity.htm supporting a safe 6.2% withdrawal rate using similar approach.

It bothers me that large numbers of people with less investment or research experience may be subjecting themselves to what I would think of as decepteptive risk
when presented in such a trust implied forum. But maybe I am wrong.

 

[Bob_Smith]

Our corporation sponsored a retirement seminar through our credit union today.

Oh-oh! Red flags are flying and alarm bells are ringing. Whenever I hear the words "retirement seminar", I visualize pick-pockets, sleight-of-hand, shell games, and vast amounts of money changing hands. The average person is better off remaining completely ignorant than being exposed to sales presentations masquerading as "education". I can just see the audience, eagerly taking notes. Roger_R nailed it with the used car sales analogy.

But I do approach my investments somewhat along the lines Jarhead mentioned - I don't put myself in a position where I will need to sell the riskiest assets to pay the bills. The higher risk stuff won't be needed for at least 10-15 years, and with re-balancing, I plan to maintain plenty of distance between me and the high risk assets as the years progress. Isn't that what most of us do? But I wouldn't want to be 90 and have a portfolio 100% in small international stocks. That would be nuts!

 

[bruce1]

AT least you get a used car from the used car salesman. Actually I have noticed here that used car salesmen are not as bad as they used to be.

 

[Jarhead*]

Hey Bob:
Yup, that's all I was saying. "let your sprinters do their job, and the "marathon runners" do theirs.
The mind-set between accumulation, and draw-down is large enough to require a sometimes complete over-haul of your previous instincts. (Of course age, your fix on where we are in the investment cycles, etc., etc., your income requirements, blah, blah, blah)
The mistakes I've made in past re: investments, is I usually errored on the side of not letting the winners run as long as I should have. So by nature, I will not end up with nothing left but high risk stocks.
However, I can think of worse things happening to me than finding myself at age 90, with just high risk stocks
Bob, my wife and I are a long way from wealthy, but we have given our adult kids quite a lot of gifting in the last few years. (Home down payments, etc. etc.). To their credit, they didn't ask for it, but the need was there).
With our net worth, probably considered inappropriate, but, as I explained to them both, "don't worry about it, your mother and I hope to live long enough to become a financial burden to you kids It keeps them on their toes
In any case, your concept of keeping a distance of 15 years , and rebalancing along the way is about what we are attempting to do.
Regards, Jarhead

 

[Bob_Smith]

AT least you get a used car from the used car salesman. Actually I have noticed here that used car salesmen are not as bad as they used to be.

I have three brothers who are used car salesmen. In fact I have been helping one of them with his books lately, so in some sense, I am a used car salesman (or at least an accomplice).

 

[Bob_Smith]

Hey Bob:
Yup, that's all I was saying.

Jarhead, that's what I thought. How do you handle rebalancing? I'm thinking every two to three years, or if the market goes bonkers in either direction.

 

[Jarhead*]

Jarhead, that's what I thought. How do you handle rebalancing? I'm thinking every two to three years, or if the market goes bonkers in either direction.

Bob:

I have about 12 funds in my I.R.A. Split between Fidelity and Vanguard. They aren't sector funds, but are concentrated in their own niche. (Unlike indexing).
My intention from here on out is to let them run until I feel that they might be on their last leg.
In my opinion, Reits are pretty close to that category, so I took about 50% of them off and added to my "chicken basket".
I don't plan on rebalancing between the funds, but when I feel that when any fund gets ahead of itself, I'll take some off the table. On the downside, I intend on
hanging in there.
Honestly, if it weren't for my kids, I probably wouldn't even mess with the stock mkt. anymore.
I've done the math. In 15 years I'll be 83
You've got a longer time frame, and the classic rebalancing would probably be appropriate for you.
Take Care, Bob

 

[ESRBob]

I stick with Sam Clem's response on this one: rebalancing once a year or so, and keeping pretty much the same asset allocation throughout your early and traditional retirement.

The seminar was aimed at retirees (though I don't think the approach makes any more sense for them), and not early retirees, so that may be affecting my opinion. Rebalancing, if anything, is even more aggressive in that you buy more of the highly volatile asset classes that go down.

The idea of blowing through all your safe asset classes, one by one and ending up with the highest risk asset classes last just seems nuts to me.

Frankly with 3 and 4% withdrawal rates, the actual percentage amounts we are changing any given asset class during the rebalance and raise cash process are pretty small.

I'd trust Bernstein, Coffee House, Bogle any day over the used car salesmen...


ESRBob