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)
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* 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.