Withdrawal Strategies (--> Wiki)

An archive of reference topics and posts (no new posts can be added)
User avatar
Wiki Admin
Posts: 557
Joined: Tue Feb 20, 2007 12:41 pm

Withdrawal Strategies (--> Wiki)

Post by gbs » Fri Feb 23, 2007 7:41 pm

An expanded version of this page can be found on The Bogleheads Wiki.

[contributions needed]

Closely related topics to withdrawal strategies are the Reference Topics Social Security and Immediate Annuities.

Vanguard Investment Counseling & Research paper on Portfolio Withdrawals:
1. Spending From a Portfolio: Implications of a Total-Return Approach Versus an Income Approach for Taxable Investors by Colleen M. Jaconetti, CPA, CFP, Vanguard Investment Counseling & Research, (09/12/2007)
Executive summary. During the accumulation years, many investors build retirement savings in both tax-advantaged accounts, such as IRAs or 401(k)s, and regular taxable accounts. When these investors reach retirement, they face decisions about how to spend from their investment portfolios—how much to spend yearly, which accounts to draw from, and how to keep the balance of the assets invested. In this paper, we explore the most common spending strategies, review best practices, and discuss some pitfalls that investors should avoid. Investors spending from a retirement portfolio typically employ one of two well known methods: the total return approach or the income approach. Historically these approaches have been discussed as mutually exclusive—an investor follows either one or the other. In reality, the two approaches are similar in many ways, and in fact operate identically up to a point. Using the total-return approach, the investor spends from both the principal and income components of his or her portfolio. Under the income approach, the investor typically spends only the income generated by the portfolio, which often is not sufficient to meet spending needs. To make up for the shortfall, many investors elect to either increase their allocation to bonds, tilt their bond holdings toward high-yield bonds, or tilt their equity holdings toward higher-dividend-paying stocks—none of which are preferred strategies for maintaining inflation-adjusted spending over long periods. Because the decision regarding a withdrawal strategy depends upon the investor’s spending goals, as well as upon his or her asset allocation, we have included an appendix that provides general spending guidelines based on various allocations, time horizons, and success rates.

Return to the Table of Contents

User avatar
Posts: 200
Joined: Mon Feb 19, 2007 6:43 pm
Location: St. Louis Missouri USA

Withdrawal Decision rules by J. Guyton, et.al.

Post by blacktupelo » Fri Feb 23, 2007 7:54 pm


User avatar
Posts: 1127
Joined: Thu Feb 22, 2007 10:29 pm

The Trinity Study

Post by Oicuryy » Fri Feb 23, 2007 11:51 pm

Retirement Savings: Choosing a Withdrawal Rate That Is Sustainable
By Philip L. Cooley, Carl M. Hubbard and Daniel T. Walz

Does International Diversification Increase the Sustainable Withdrawal Rates from Retirement Portfolios? by Philip L. Cooley, Ph.D.; Carl M. Hubbard, Ph.D.; and Daniel T. Walz, Ph.D.

The research reported here examines the effect of international equity diversification on the sustainability of a range of withdrawal rates from retirement portfolios with varying U.S. and international stock/bond asset allocations. Sustainability of a withdrawal rate is measured by portfolio success rates, that is, the percentage of 1,000 simulated portfolios of a rebalanced asset allocation that completed 15-, 20-, 25- and 30-year payout periods with positive values. Although the return/risk impact of international stocks on U.S. portfolios has changed over the past 30 years, our research suggests that retirees with portfolios composed of 50 percent equities or greater would benefit only modestly in the long run from international diversification.

International Diversification and Retirement Withdrawals by Danny M. Ervin, Larry H. Filer, and Joseph C. Smolira

The results of the study indicate that for a domestic portfolio consisting of at least 60 percent U.S. stocks, and a nominal withdrawal rate of 6 to 7 percent is generally sustainable for a period as long as thirty years. For the entire period, the results show that a portfolio consisting of the S&P/IFC Composite Global Index and U.S. corporate bonds would have been less successful in providing fixed withdrawals from a retirement portfolio. However, in recent years, portfolios consisting of global stocks have often had higher terminal values than U.S. stock portfolios

The 4% Rule—At What Price? by Jason S. Scott, William Sharpe, and John G.Watson (April 2008)
The 4% rule is the advice most often given to retirees for managing spending and nvesting. This rule and its variants finance a constant, non-volatile spending plan using a risky, volatile investment strategy. As a result, retirees accumulate unspent surpluses when markets outperform and face spending shortfalls when markets underperform. The previous work on this subject has focused on the probability of short falls and optimal portfolio mixes. We will focus on the rule’s inefficiencies—the price paid for funding its unspent surpluses and the overpayments made to purchase its spending policy. We show that a typical rule allocates 10%-20% of a retiree’s initial wealth to surpluses and an additional 2%-4% to overpayments. Further, we argue that even if retirees were to recoup these costs, the 4% rule’s spending plan often remains wasteful, since many retirees may actually prefer a different, cheaper spending plan.

added by Barry Barnitz

User avatar
Posts: 6511
Joined: Mon Feb 19, 2007 8:51 pm

Post by bob90245 » Sat Feb 24, 2007 6:40 pm

Article: Withdrawal Strategies: Articles and More
Author: bob90245
Description: A collection of resources on withdrawal strategies in retirement. These include:

1) Articles (to both web pages and pdf files)
2) Calculators
3) Books that discuss investing/withdrawing in retirement

This article is in three parts
1) Main Page - Includes a description of the 5 categories of withdrawal strategies
2) Even More
3) Revision History

User avatar
DRiP Guy
Posts: 2237
Joined: Tue Feb 20, 2007 4:54 pm

Post by DRiP Guy » Sat Feb 24, 2007 7:22 pm

Article: Sensible Withdrawals
Author: Peter Ponzo aka 'gummy'
Description: An approach to withdrawal of retirement funds base on a minimum, plus what market gains allow.

This article is in three parts:
1) Sensible Withdrawal
2) Maximum Withdrawal
3) Annuities

User avatar
Barry Barnitz
Wiki Admin
Posts: 2963
Joined: Mon Feb 19, 2007 10:42 pm

Housing and Withdrawals

Post by Barry Barnitz » Tue May 01, 2007 3:28 am

1.) Optimal Retirement Asset Decumulation Strategies:The Impact of Housing Wealth by Wei Sun, Robert K. Triest, and Anthony Webb (January 20, 2007)
We estimate the relationship between the returns on housing, stocks, and bonds, and simulate a variety of decumulation strategies incorporating reverse mortgages. We show that homeowner’s reversionary interest, the amount that can be borrowed through a reverse mortgage, is a surprisingly risky asset. Under our baseline assumptions we find that the average household would be as much as 24 percent better off taking a reverse mortgage as a lifetime income relative to what appears to be the most common strategy: delaying tapping housing wealth until financial wealth is exhausted and then taking a line of credit. In addition, the results show that housing wealth displaces bonds in optimal portfolios, making the low rate of participation in the stock market even more of a puzzle.

2.) Selection and Moral Hazard in the Reverse Mortgage Market by Thomas Davido and Gerd Welke, (October 2004)
This paper explains why selection in the US reverse mortgage market to date has been advantageous rather than adverse. Reverse mortgages let \house rich, cash poor" older homeowners transfer wealth from the wealthy period after their home is sold to the impoverished period before. Near absence of demand seems to contradict life cycle
consumption theory and has been blamed in part on large up-front fees. These fees, in turn, are justifed by adverse selection and moral hazard concerns related to length of stay in the home. In fact, reverse mortgage loan histories and the American Housing Survey reveal that single women who are reverse mortgage borrowers depart from their homes at a rate almost 50 percent greater than observably similar non-participating
homeowners. This surprising fact appears to arise from the phenomenon that the types of people who wish to take equity out of their homes through reverse mortgage borrowing are also likely to take out the remaining home equity by selling their homes. This mechanism is similar to the heterogeneity in risk aversion proposed by de Meza and Webb (2001) to rationalize advantageous selection in insurance markets. Further results suggest that future declines in price appreciation may generate sufficient moral hazard as to undermine the advantageous selection seen to date.
Image | blb | December Birthday Celebration: Ludwig van Beethoven

User avatar
Barry Barnitz
Wiki Admin
Posts: 2963
Joined: Mon Feb 19, 2007 10:42 pm

More on Sustainable Retirement Withdrawals

Post by Barry Barnitz » Tue May 29, 2007 10:25 am

1.) Sustainable Retirement Income for the Socialite, the Gardener and the Unhealthy by Robinson, Chris and Tahani, Nabil (May 16, 2007)
This paper advances the literature on the sustainability of retirement income by making consumption a stochastic variable instead of a constant real value, as previous papers have done. The paper continues to make the rate of return and date of death stochastic variables, as Milevsky and Robinson (2000, 2005) do. The sustainability of retirement income depends on the nature of the lifestyle that the retiree chooses. The difference in shortfall probabilities or risk of ruin between the variable cases and the fixed consumption case is significant, and so the planner needs to take this into account. The difference in shortfall probabilities between making consumption a non-constant but deterministic amount, and making it also stochastic, is not as important, because it doesn't reduce risk enough to make more aggressive consumption rates secure. Finally, making consumption correlated with the rate of return, which implies the family adjusts consumption as its wealth changes, reduces shortfall probabilities to a moderate extent. In general, an initial consumption of more than 4% of initial wealth is not sustainable for any likely set of conditions. In the very best case, an initial consumption rate of 6% is sustainable, but we think that case will fit very few people.

2. Guidelines for Withdrawal Rates and Portfolio Safety During Retirement by John J. Spitzer, Ph.D.; Jeffrey C. Strieter, Ph.D.; and Sandeep Singh, Ph.D., CFA, FPA Journal (October 2007)
* The existing literature for retirement portfolio withdrawal rates suggests that a real withdrawal rate of 4 percent of the initial portfolio is “safe.” This paper demonstrates that a blanket “4 percent withdrawal” rule may be an oversimplification of a complex set of circumstances.
* Risk tolerance, asset allocation, withdrawal size, and expected returns all affect the process of withdrawing from a retirement portfolio. To advance previous research, this paper uses 21 stock/bond allocations and 71 withdrawal rates, for 1,491 possible combinations. For each of these combinations, 10,000 bootstrap iterations are run for 30-year periods.
* Results show that withdrawal rates as high as 5.5 to 6 percent can be achieved, but only at a 25 to 30 percent chance of running out of money and with stock allocations of 75 to 100 percent. A 4.4 percent withdrawal rate with a 50/50 bond/stock allocation has a 10 percent chance of running out of money.
* To visually illustrate the results for clients, the paper develops easy-to-understand withdrawal contours, runout contours, and balance-remaining contours that clearly reveal the relationship between asset allocation, withdrawal rates, the chance of running out of money, and estate building. First, given a tolerance for the chance of running out of money, the largest amount that can be withdrawn can be determined. Second, the contours can be used to provide the client’s optimal asset allocation for a fixed withdrawal rate and a given tolerance for running out of money. Third, the withdrawal amount at various levels of tolerance for running out of money can be determined while holding the asset mix constant.

[contributed by Vegomatic]
Last edited by Barry Barnitz on Tue Oct 09, 2007 12:00 am, edited 1 time in total.
Image | blb | December Birthday Celebration: Ludwig van Beethoven

User avatar
Barry Barnitz
Wiki Admin
Posts: 2963
Joined: Mon Feb 19, 2007 10:42 pm

Bengen Papers on Sustainable Withdrawal Rates

Post by Barry Barnitz » Mon Oct 08, 2007 11:59 pm

The Wiilliam P. Bengen series of articles on Sustainable Withdrawal Rates:

1. Determining Withdrawal Rates Using Historical Data FPA Journal (October 1994)
At the onset of retirement, investment advisors make crucial recommendations to clients concerning asset allocation, as well as dollar amounts they can safely withdraw annually, so clients will not outlive their money. This article utilizes historical investment data as a rational basis for these recommendations. It employs graphical interpretations of the data to determine the maximum safe withdrawal rate (as a percentage of initial portfolio value), and establishes a range of stock and bond asset allocations that is optimal for virtually all retirement portfolios. Finally, it provides guidance on "mid-retirement" changes of asset allocation and withdrawal rate.

2. Asset Allocation For A Lifetime FPA Journal (August 1996)
John and Wendy Elgar are a new client couple of mine, both retired and age 65. At a previous meeting, I had presented to them the method of retirement money management I had discussed in my October 1994 article in the Journal of Financial Planning, "Determining Withdrawal Rates Using Historical Data." They seemed quite interested, but as this follow-up meeting begins, it is clear they have a number of questions

3. Conserving Client Portfolios During Retirement, Part III FPA Journal (December 1997)
This article presents new findings in the author's ongoing research into asset allocation and withdrawal rates during retirement. The goal, as before, is determining how much money clients can extract from their portfolio annually without running out. This article explores the effects of adding smallcap stocks and Treasury bills to the asset mix. Retirement scenarios are expanded to include retirement beginning on the first day of any quarter, rather than just on January 1, as in earlier research. Refined advice is given on the selection of stock allocation within the "recommended" range, and earlier use of the term "risk tolerance" is corrected to "volatility tolerance." "Post-crash" planning issues, including "Black Hole" clients and "Withdrawal Envy," are examined. Finally, some corrections are made to earlier conclusions on planning for taxable portfolios.questions.

4 .Conserving Client Portfolios During Retirement, Part IV FPA Journal (May 2001)
The author presents new findings in his ongoing research into asset allocation and withdrawal rates during retirement. The goal, as in earlier articles in this journal, is determining how much a client can extract from his or her portfolio annually without running out of money during lifetime. This article explores alternative withdrawal strategies: (1) a "Prosperous Retirement" model—larger withdrawals early in retirement—and (2) a performance-based model—relating withdrawals to portfolio performance.

5. Baking a Withdrawal Plan 'Layer Cake' for Your Retirement Clients FPA Journal (August 2006)
Executive Summary

* In determining an appropriate withdrawal rate for a client, the planner must address "special situations" that can enhance or reduce the withdrawal rate. It's helpful to think of these special situations as layers in a cake. This paper, using three examples, shows how to "bake" such a cake.
* The foundation of the cake is the withdrawal scheme. Four possible withdrawal schemes are presented: (1) maintaining the same lifestyle throughout retirement, (2) declining discretionary spending, (3) performance-based withdrawals, and (4) annuity-like withdrawals.
* Four fundamental assumptions must be addressed that affect the withdrawal scheme chosen: the tax status of the portfolio, the client's time horizon, the asset allocation, and rebalancing. Additional enhancements or detractions from the basic withdrawal scheme include "success rates" based on historical returns, rebalancing intervals, and the desire to leave or not leave a legacy.
* Based on commonly accepted factors, the base withdrawal rate is 4.15 percent.
* A layer cake is built for a "moderate" client who chooses the lifestyle withdrawal scheme, along with factors such as a 94 percent success rate, the inclusion of small-company stocks, and less frequent rebalancing that boost his withdrawal rate to 5.1 percent.
* The "conservative" client wants to leave a legacy and assumes a longer than 30-year lifespan, reducing her withdrawal rate to 4 percent.
* The "aggressive" client assumes a shorter than 30-year lifespan, a performance-based withdrawal approach, and other factors that boost his withdrawal rate to 7.6 percent.

Return to the Table of Contents
Image | blb | December Birthday Celebration: Ludwig van Beethoven

Posts: 1885
Joined: Wed May 02, 2007 8:30 am
Location: Seattle area USA

comparison of variable withdrawal rates

Post by freebeer » Thu Aug 14, 2008 10:06 am

I found the web article referenced below very helpful, it apples-to-apples compares (back testing) various strategies that try to improve on the "take inflation-adjusted 4% of initial portfolio" rule of thumb, including gummy's Sensible Withdrawals and others mentioned above.


User avatar
Posts: 4911
Joined: Tue Feb 20, 2007 3:27 pm
Location: just barely Outside the Beltway

Nobel Laureate Bill Sharpe-retirement withdrawal strategies

Post by bobcat2 » Thu Aug 14, 2008 10:36 am

Efficient Retirement Financial Strategies by William F. Sharpe, Jason S. Scott, and John G. Watson - July 2007
(forthcoming in John Ameriks and Olivia Mitchell, Recalibrating Retirement Spending and Saving, Oxford University Press, 2008)

Virtually all retirees have an explicit or implicit retirement spending and investment strategy. What is striking is the gulf that exists between how financial economists approach the problem of finding optimal retirement strategies and the rules of thumb typically utilized by financial advisors. Aside from identifying this gap, our objective with this chapter has been to evaluate the extent to which several popular retirement spending and investment strategies are consistent with expected utility maximization. This evaluation has two stages. First, is the given rule of thumb consistent with expected utility maximization for any investor? Second, if it is, how must the rule’s investment and spending strategies be integrated to achieve and maintain efficiency?

By and large, we find that the strategies analyzed fail one or more of our tests. Investment rules suggesting risk glide paths pass the first assessment in that they are not per se inconsistent with expected utility maximization. However, the conditions on the implied spending rule required by efficiency seem onerous and unlikely to be followed by virtually any retirees. While risk glide paths only specify suggested investments, the 4% rule is fairly explicit about both the recommended spending and investment strategy. Unfortunately, the 4% rule represents a fundamental mismatch between a riskless spending rule and a risky investment rule. This mismatch renders the 4% rule inconsistent with expected utility maximization. Either the spending or the investment rule can be a part of an efficient strategy, but together they create either large surpluses or result in a failed spending plan.


Bob K
In finance risk is defined as uncertainty that is consequential (nontrivial). | The two main methods of dealing with financial risk are the matching of assets to goals & diversifying.

Posts: 9
Joined: Fri Nov 14, 2008 1:19 pm

Post by sandra040772 » Sat Nov 29, 2008 9:00 pm

Investors and portfolio managers alike have been shellshocked by the stock market's decline and its extreme volatility. Investment models that once seemed bulletproof have been exposed as inadequate, none more surprisingly than the recently introduced managed-payout retirement income portfolios.

The market has exposed incongruities in the design and structure of these new funds, revealing that investors' No. 1 fear — running out of money — has not been sufficiently addressed by the funds.

The primary focus of retirement income portfolios should be risk/volatility control because "sequence of return" issues represent the greatest risk to distribution portfolios. Those entering retirement this autumn with retirement accounts shrinking before their eyes are coming to realize that the "when" of taking distributions is just as important as the "what."

While the risks connected to the timing of distributions can never be eliminated, all components of fund operations should act to minimize this risk. Unfortunately, this is not reflected in the designs of today's managed-payout funds. Their focus is on consistent income, not risk control.

Although using sophisticated asset allocation methods and attaching systematic distribution mechanisms designed to generate consistent income, the funds list in their literature the same risk disclosures used for accumulation funds.

no pain no gain