Joined: 28 Apr 2013
Location: Southern California
SWR and the change from accumulation to distribution
In another thread, the topic was changing from the OP to market performance over the long haul, the 4% SWR rule, and return risk in retirement. So rather than highjack that thread, I thought I'd start another to continue along the lines introduced there.
In an article entitled "Understanding Sequence Of Return Risk – Safe Withdrawal Rates, Bear Market Crashes, And Bad Decades", Michael Kitces discusses this very issue:
" Watching a portfolio experience market volatility in the first few years of retirement can be terrifying to a new retiree, raising legitimate questions of whether there’s a danger that early declines plus ongoing withdrawals could lead to a retirement spending shortfall. And as the safe withdrawal rate research has shown, that danger is real – in fact, it’s been dubbed the “sequence of return” risk to retirement spending...
"In fact, a deeper look at the data reveals that there is remarkably little relationship between returns in the first year or two of retirement, and the safe withdrawal rate that can be sustained in the portfolio…
"Instead, it turns out that the true driver of sequence of return risk and safe withdrawal rates are the returns that the retiree earns over the first decade..."
The second link is to a blog post by Wade Phau, PhD. summarizing some of the current academic work on the subject of optimizing life-cycle investing. Of particular interest is the reference to a U-shaped lifetime asset allocation path.
And finally, the last 2 links discuss specifically the concept of a rising equity glidepath (the right side of the U-shape) in retirement. (The first is a bit more readable, the second contains the results of research and takes some time to wade through).
"In fact, as our research on partial annuitization showed, it turns out that much of the benefits being attributed to that bucketing strategy were not about the benefits of annuitization and having cash flows to avoid early withdrawals at all. Instead, the benefits of the strategy were actually primarily attributable simply to the path that the retiree’s asset allocation follows as a result of spending down fixed-income assets in the early years and letting equity exposure rise..."
Then on top of all of this a lot of which is theoretical, there is the question of how real people actually behave in retirement. Most people don't follow the 4% rule. I certainly don't and I don't recommend it either other than as a general rule of thumb for getting rough estimates for planning. People are guided by heuristics and usually use more gut feelings to adjust along the way just like they did during their working lives. But I do find it interesting to look at the subject from various angles anyways.
Information is more valuable sold than used â€“ Fischer Black
Mon Nov 03, 2014 3:15 pm
Wino Senior Member
Cash: $ 113.80
Joined: 03 Aug 2012
Re: SWR and the change from accumulation to distribution
quote:Originally posted by blixet Most people don't follow the 4% rule. I certainly don't and I don't recommend it either other than as a general rule of thumb for getting rough estimates for planning.
The charts tend to support my contention that the 4% rule allows for portfolio growth (to account for some low inflation) while still allowing for a pragmatic withdrawal rate. Of course no one follows the rule every month, but it's there as an indicator of your ability to maintain an income without any salary. If you're withdrawing at an annual rate of 10%, you aren't going to get 20 years out of your money. If your rate is 3%, then you'll probably see after-inflation growth, which is my goal.
You didn't address my suggestion concerning the "transfer to 'safe' funds" at retirement is a bad idea, given typical retirement ages and actual longevity. I contend that moving to bonds is not smart, and I'll be testing that theory myself at retirement.
The above only addresses stock-market-based funds. I agree with LittleRoc's plan to diversify outside the stock market, but I don't think bond funds or bonds are where I'll be putting any of my money. Right now, I have less than 1% in bonds, and that's only because there's no real way to remove bonds completely from my portfolio without the equivalent of financial gymnastics to do so.
As an aside, the reader application they use for that finance journal is the absolute worst I have ever used. It looks nice, but the ability to navigate is horrible. I couldn't even browse the article, so all of the comments about the figures are worthless. What's wrong wtih PDF or even HTML layouts? That application he uses makes reading the article impossible, and I gave up out of frustration.