Systematic Withdrawal from Retirement Portfolio - JuniperCivic.com
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Originally published in the March 2005 Juniper Berry Magazine

Systematic Withdrawal from Retirement Portfolio

Arthur Dolega

Since we tend to live longer now, and

therefore spend more time in retirement,

the old question of how much to

take out from your portfolio is becoming more

and more relevant. Let's assume a person

accumulated a nice sum of money through

participating in their 401k or other plans at

work. Now it is time to retire. He or she now

has a dilemma: How much to take from my

retirement investments, so that I don't

deplete the principal? It could also be stated

as: What is the safe withdrawal rate from

my accounts, so that I don't outlive my retirement

assets? Even a couple of hundred dollars

per month could make a tremendous difference

for the retiree. If he or she takes out

a small amount, it may impede their quality of

life. There may be less money available for

travel, medications, house maintenance, or

simply gifts for grandchildren. If the withdrawal

is too aggressive, the person will be

dipping into the principal and the portfolio

may not provide comfortable retirement for

too long. Finding the balance has been like

looking for the golden bullet.

There are number of financial instruments

that will generate income during your retirement.

Your retirement portfolio may consist

of stocks, bonds, mutual funds or annuities.

Each of these securities will in their own way

contribute to your income needs.

Stocks may pay dividends; bonds and other

fixed income instruments will yield interest.

Money management companies will report

the performance results in the form of total

return. Some will print them on the quarterly

statements you are receiving.

Older research suggested that 4% annual

withdrawal was the safe systematic withdrawal

rate from retirement accounts.

(Bengen 1994, 96,97). These results were

based on a portfolio of stocks only.

The newest data, recently published by

Jonathan T. Guyton (1) proposes that retirees

may withdraw more, without worrying about

outliving their funds, if the portfolio is properly

allocated. Guyton says that a rate may be

as much as 6% per year. More specifically, a

person has a chance of withdrawing 5.8%

annually from their portfolio for 40 years without

dipping into their principal if the portfolio

invests 65% in stocks. The greater the

allocation in stocks, the higher the potential

rate of withdrawal. Guyton's research suggests

that an 80% allocation in stocks will allow a

retiree to withdraw 6.2% annually over an

extended period of time, without affecting

the account's balance. Of course, it needs to

be a diversified portfolio containing large, mid

and small company stocks, as well as international

stocks and REITS (real estate investment

trusts).

Other planning techniques were also used in

research including:

-selling of assets that have appreciated over

the prior year and now take up larger portion

of the portfolio- than originally designed

-annual withdrawal in January of each year

-deciding which assets to sell or retain (assets

that lost value in the prior year were retained).

Guyton's results propose that even retirees

may want to keep 65% of their portfolio in

stocks, if they need relatively high income

and want to preserve their capital over time.

Therefore, a $200,000 retirement account

allocated 65% in stocks hypothetically should

pay $967/mo without affecting the principal

over time (using the proposed 5.8% annual

withdrawal rate). What makes the results

more credible is that the researcher used particularly

stormy period of time in his

assumptions. They are based on the years

1973-2003. Those years include two separate

stock market crashes, one in 1973-74, and

another in 2000-2002. Let's also remember

the high inflation in the 70's.

Each of us has different financial goals, tax situation

and tolerance for risk. I wouldn't recommend

the 65% or 80% allocation in stocks

to everyone in their retirement portfolio. It

is, however, a good starting point that will

help many planners and their clients in calculating

and projecting the retirement income

needs.

(1) Jonathan T. Guyton Decision Rules and Portfolio

Management for Retirees: Is the Safe Initial Withdrawal

rate Too Safe? Journal of Financial Planning, October 2004

This Material is not intended to replace the advice of a

qualified attorney, tax adviser, investment professional or

insurance agent. Before making any financial commitment

regarding the issues discussed here, consult with

the appropriate professional.