When advising clients on a suitable rate of
withdrawal from their portfolios during retirement,
we face the challenge of recommending a level of
withdrawal that could be less than possible, often
less than desired, but within parameters intended
to transcend the retirement years. As a general
rule, when retiring in your early 60s, a gross
portfolio withdrawal rate of 3%-4%, increasing
annually by inflation, has been found to be a
generally prudent strategy. Although maintaining
one's current lifestyle in retirement ranks primary
for many retirees, achieving that goal is often
challenging, and secondary to outliving your
savings. This brings to mind the old adage, it's
better to be safe than sorry. However, a recent
article by Jonathan Clements in the Wall Street
Journal suggested that our "general rule" could be
Mr. Clements's described a new study by certified
financial planner Jonathan Guyton that suggested
retirees may be able to withdraw as much as
5.8% initially from a balanced, diversified
portfolio, which included a 10% allocation to
cash. Based on historical returns, Mr.
Guyton found that retirees could generate 40
years of income while surviving brutal
market conditions, such as high inflation
and a steep market decline early in retirement, if
they follow his three rules.
- If your portfolio loses money during the year,
you cannot give yourself a raise the following
year, not even to compensate for inflation. Your
portfolio's beginning of the year value must
be greater than last year's beginning value plus
the total of your withdrawals for that year.
- No matter how high inflation gets, your
maximum annual increase is 6%.
- You have to avoid selling hard hit stock funds.
Instead, each year, start by lightening up on
The article does acknowledge the fact that this
strategy is based on historical returns and
continues to alert readers that "if we get wacky
markets, miserably low long-run returns, you may
have to withdraw less than Mr. Guyton suggests."
He goes on to say that because the first and
second rules will occasionally limit spending
increases, there's a chance that retirees who use
Mr. Guyton's strategy will receive less total
income over 40 years than if they had started with
a lower initial withdrawal rate but got inflation
increases every year.
For us, the study touches on a recurring
challenge we face in providing retirement
planning counsel. That being, by adhering to a
3%-4% withdrawal rate, is the retiree sacrificing a
more enjoyable lifestyle in retirement than is
possible? Would a 5.8% rate deplete the portfolio
sooner than expected? Although Mr. Guyton's
strategy sounds appealing, the risk involved
could be considerable since past
performance is not indicative of future
performance. More importantly, could his
strategy be taking too much risk at a time
when the possibility or the opportunity to
re-enter the work force no longer exists.
This study also relied on "rebalancing"
appreciated assets to cash rather than reinvesting
in depreciated assets, and being willing to
liquidate bonds below their target allocation if
equities underperformed for a period of time.
These are the challenges we face with you. Our
primary objective is to help you reach your primary
objective. This article will provide some
interesting discussion for investment reviews with
you in the coming months. We look forward to
having that conversation.
As always, we will continue to proactively evaluate
and assess the value of new developments within
our industry whether it be retirement planning,
investments, taxes, or estate planning and integrate
those concepts that we or your other advisors
believe could enhance your situation.