I am in my mid-50’s and I am planning to retire in the next couple of years. Naturally, my thoughts have been turning towards withdrawal strategies. The basic strategy, of course, is Bengen’s 4% rule. Simply, take 4% of the portfolio value at the start of retirement and adjust it for inflation each year, ignoring portfolio fluctuations along the way and relying on history as a guide that it will be fine for you as well.
This has the advantage of simplicity and a fair amount of back-testing support, but almost definitely not the strategy I would choose (I am sure that even Bengen never intended it to be a fill it and forget it method for the full length of retirement either). My thoughts are:
- 4% worked in the past. But this time is different - interest rates are super-low, global economy-stopping pandemics are a real thing, stocks are over-valued, take your pick.
- 4% is the SWR - the Safe Withdrawal Rate. Aka, the minimum withdrawal rate that in the last century worked for at least 30 years before the portfolio ran out. In reality, there is a different withdrawal rate that will work for a given starting year of retirement and asset allocation. But there is no way of knowing a priori what that withdrawal rate is for you. So, if you used the 4% rule at any time in the past century, you would have left money (quite often, a lot of money) on the table at the end of your retirement.
- The fear of running out of money in retirement is as real as range anxiety is for electric car drivers and this causes many retired people (and electric car drivers) to be needlessly cautious in their spending.
- FOMO - the Fear Of Missing Out - is real too. The regret minimisation framework argues against the above rule and says that we should spend more money. Especially because our health and energy decline with age and I’d rather spend more money now than look back in my eighties with many unexperienced bucket list items and a fat portfolio.
So, I am leaning towards a modified (or at least a simplified) form of Guyton-Klinger rules as my preferred withdrawal strategy. Briefly, the strategy says:
- Decide three parameters: an initial withdrawal rate (R0), a guardrail percentage (G) and finally, a portfolio adjustment percentage (A). For the purposes of illustration, let us assume R0 as 5%, guardrails of 1% and portfolio adjustment rate of 10%.
- In the first year, withdraw R0% of your portfolio. Assuming a starting portfolio of $1M, this would be 50K in our example.
- In the second year, adjust the previous year’s withdrawal amount by the previous year’s inflation. Calculate R1 as new withdrawal amount divided by the current portfolio value. f the portfolio fell in the previous and R1 causes the withdrawal rate from the new portfolio value to be greater than R0, stick to R0. For example, if the portfolio value is now more than $950K (1M minus previous year’s 50K withdrawal), use the calculated withdrawal amount . If the portfolio fell below 950K instead, the withdrawal would remain at 50K. You never make up the missed inflation adjustment in subsequent years.
If R1 falls outside the guardrails, i.e. less than 4% (R0 - G) or 6% (R0 + G), adjust the withdrawal amount by 10% (the portfolio adjustment rate) in the appropriate direction. For example, if the portfolio value fell to 750K and your withdrawal amount was still 50K, the withdrawal rate will become 6.67% (50/750). So, we reduce it to 45K (50 - 5). If instead, the portfolio value had jumped to 1.3M, 50K withdrawal would be 3.8% and hence the amount would be adjusted to 55K. Subsequent years will be calculated on this amount.
- G-K has a few other rules about which pot of money to withdraw from and when to stop applying these rules once you get to a certain age, which I will ignore.
What are bogleheads thoughts on using the G-K (or similar strategy) as a way to discover your own personal safe withdrawal rate?