Accumulation-dynamic decumulation

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Accumulation-dynamic decumulation (ADD) is a percentage withdrawal method that reduces the risk of withdrawal volatility. It can be used as an extension of either constant percentage withdrawal or Variable percentage withdrawal. To manage short term withdrawal volatility, ADD uses smoothing of the asset. For medium term, it uses an increase cap. For long term, it uses a reserve.

Each year, the regular withdrawal is determined by the smoothed value of the fund. The regular withdrawal is capped if there was excessive return on asset. A reserve withdrawal is determined to maintain 95% of previous high water mark withdrawals. The spreadsheet allows backtesting on US set only (1871-2017).[1][2]

Download location

Download the latest ADD spreadsheet. The light version allows comparison of the various strategies over a single year. The full version allows also to produce backtesting over last century for various configuration :

Dropbox

Google Drive

Spreadsheet compatibility

The spreadsheet is relatively heavy. It may take a while to load (5 min). The spreadsheet is developed using the Excel. It is also tested using google sheet for compatibility. As a result, some compatibility issues may arise when using other spreadsheet products.

Screenshots

Screenshot ADD Cash flow of various historical retirement date using constant percentage withdrawal at 6.5% and 100% equity

Reserve

ADD set aside 25% for provision for adverse deviation. This reserve will then be used if regular withdrawal falls below 95% of the high water mark of prior withdrawal. A maximum reserve withdrawal of 10% is established to prevent reserve fund depletion. The objective is to allow withdrawal drops during market downturn up to a predetermined level. If market never recovers, further cuts must be made. We may want to see 5% (100%-95%) of the yearly regular withdrawal as a bonus which may not be available next year. Any excessive reserve can be used for any emergencies without worrying too much about it repercussion.

Ex:

  • Highest prior withdrawal = 50,000$
  • Current regular withdrawal = 40,000$
  • Reserve withdrawal = 7,500$ = 50,000 * 95% - 40,000

Capping

ADD caps the withdrawal or expected withdrawal based on last year. The cap serves as a protection against adverse deviation in the middle terms. Different caps levels are used for before, on and after retirement. During prolong economic growth the cap increase by 1% for each previous year cap.

Ex:

  • Prior regular withdrawal = 50,000$
  • Current cap regular withdrawal = 52,500$ = 50,000 * 105%

Smoothing

ADD smooths the short-term withdrawal by doing a linear smoothing (similar to moving average) of the average fund value over the last 5 years, adjusted for inflation. This smoothed market value can be considered as the average market value over the last 5 years. Short term fluctuations are delayed through the following years. If market goes up and down during the period, the smoothed value reduces some short-term volatility.[3]

Philosophy

We should not only look at decumulation, but also at the accumulation phased. By leveraging our knowledge of the past, we lessen retirement date risk and sequence of return risk. Retiring before or after a crash should not produces drastically different withdrawal. Instead, decumulation strategy should be long term based without too much focus on current market value. Decumulation strategy has to endure many decades of market fluctuation.

While smoothing and increase cap may be and are used as “timing market strategy”, the purpose in this strategy is not to time the market. Smoothing is used to reduce the volatility of withdrawal. Increase cap and the reserve are used to create a provision for adverse deviation. The unsmoothed, uncapped and without reserve may provide more cash flow than the alternative. With these strategies, we try to reduce withdrawal volatility regardless of market condition.

Inflation used to be a greater risk than it is now. Most federal banks around the world have pledged for low inflation target ([4][5]). This strategy default focuses on nominal terms. However, there’s an option to adjust for real terms.

Parameter

There are four major decisions to make:

  • Asset allocation (Data tab cell B21): This should be based of your need, ability and willingness to take on risk.
  • Withdrawal pattern (Data tab cell I17): Select Constant Percentage Withdrawal or Variable Percentage Withdrawal. CPW allows for endowment like cash flow which never depletes the funds and may have more funds at death than at retirement. VPW instead tries to withdraw increasing amount of money through retirement. This allows using most of the available funds prior to death, but it leaves less for bequest motives.
  • Protecting against inflation (Data tab cell J26): Retiree are known to need less year to year.[6] With the current target inflation (2%), it is reasonable to not protect against inflation and enjoy greater withdrawal now and less latter. If you rather enjoy more or the same real value later, than this parameter should be set to “On”.
  • Withdrawal percentage (Data tab cell H20, J20): It depends on the previous three decisions and on risk tolerance. For ADD+CPW, 5.5-6.5% provided low to medium risk without inflation protection. With inflation protection, 3.5-4.0% provided low to medium risk. For ADD+VPW, we multiply the VPW prescribed withdrawal rate by 100-130% to provide low to medium risk without inflation protection. With inflation protection, the multiplication factor is 70%-90% to provide low to medium risk. While these seem high withdrawal rates, the effective withdrawal will be about 75% of it due to the 25% reserve.

Other parameters can be found under the advance parameter tab.

ADD manual process

ADD is best used in conjunction with guaranteed base income from Social Security, pensions, and, if necessary, inflation-indexed Single Premium Immediate Annuity (SPIA).

Missing payments, between retirement and the start of Social Security pension, can be provided by using a simple CD ladder. For the purposes of ADD calculations, the money set aside in this CD ladder should not be considered as part of the portfolio.

It has been suggested to delay the Social Security pension to age 70 to increase base income in Bogleheads® forum topic: Delay Social Security to age 70 and Spend more money at 62.

  1. Split the retirement fund into regular fund (75%) and reserve (25%).
  2. The following procedure should be repeated each year before retirement and after retirement:
    1. Calculate the smoothed regular fund value
    2. Multiply the regular withdrawal percentage by the smoothed regular fund value. Use the regular withdrawal percentage based of either Variable percentage withdrawal(prescribed withdrawal rate * 70% to 130%). or constant percentage withdrawal(3.5% to 6.5%).
    3. Multiply last year withdrawal or expected withdrawal by the increase cap to limit the previous result. If before retirement, use a cap of 115%. If at retirement, use a cap of 108%. If after retirement, use a cap of 105%.
    4. Find the maximum previous withdrawal after retirement.
    5. Multiply maximum previous withdrawal multiply by reserve protection (95%).
    6. Subtract the previous result over the regular withdrawal. The difference is the reserve withdrawal amount.
    7. Cap this reserve withdrawal amount to 10% of the reserve fund.
    8. Withdraw the withdrawal amount from the regular fund, reserve withdrawal amount from the reserve fund and rebalance your portfolio.
  3. Every few years, you should review your overall retirement plan.
  4. Around age 80, if you're still alive, it is important to consider using part (but not all) of your remaining portfolio to buy an inflation-indexed Single Premium Immediate Annuity (SPIA), so that total non-portfolio income (including Social Security, pension, and other lifelong income) is sufficient to live comfortably, independently of future portfolio withdrawals. This aims to reduce the financial risks associated with living past age 100.
  5. It is suggested to limit the withdrawal percentage to no more than 10%, after buying the inflation-indexed SPIA.

With the spreadsheet

  1. Save a copy of spreadsheet on your computer. The spreadsheet is slow otherwise.
  2. Open the spreadsheet with Microsoft Excel or Google Sheets.
  3. Click on the Read Me tab and read its content.
  4. Click on the Data tab and:
    1. Enter the required data: Date of retirement, Birth, ADD Pattern, Asset allocation, Soft Target risk which drives the reserve protection, Inflation protection which will adjust the withdrawal rate, the Balance and Cash flow of your retirement fund of the past few years.
    2. Enter the optional data: The amount of Projected contribution and how fast it is expected to rise. The Hard Target risk which drives the display on the Back testing tab. The other income you will receive either as indexed pension (Social security or other) or non-indexed pension. The Reserve balance and cash flow if already post retirement.
  5. Click on the Back testing tab and:
    1. Enter the Historical retirement Date you want to compare with other strategies.
    2. Enter which other withdrawal strategies you want to compare.
    3. Enter which other historical retirement date you want to compare using ADD withdrawal.
  6. Click on the Advance Parameters tab if you want to further test with other settings
    1. Each year:
      1. Check that the asset allocation corresponds to the planned allocation of your portfolio for the upcoming year (Stocks and Bonds). If necessary, adjust the values. (This happens, for example, when a retirement portfolio is on a glide path).
      2. At the beginning of the year, enter the Balance of your regular and reserve portfolio to compute the Suggested Withdrawal amount which under Back testing tab using real retirement date as the historical retirement date.
      3. Make the withdrawal and rebalance your portfolio (at the beginning of the year!).
    2. Every few years, you should review your overall retirement plan.
    3. Around age 80, if you're still alive, it is important to consider using part (but not all) of your remaining portfolio to buy an inflation-indexed Single Premium Immediate Annuity (SPIA), so that total non-portfolio income (including Social Security, pension, and other lifelong income) is sufficient to live comfortably, independently of future portfolio withdrawals. This aims to reduce the financial risks associated with living past age 100.
    4. It is suggested to limit the withdrawal percentage to no more than 10%, after buying the inflation-indexed SPIA.

Support

On-going discussion and support is in Bogleheads® forum topic: Accumulation-Dynamic Decumulation Strategy.

See also

References

Further reading