Thursday, July 3, 2014

Two Interesting Videos on Dynamic Systematic Withdrawal Strategies

UPDATE: There is a mistake in this graph.  See our post of April 26, 2015 for an explanation.

Dr. Wade Pfau has posted two video interviews with Michael Kitces and Jonathan Guyton that readers may find of interest.

Of particular interest is the statement by Messrs Kitces and Guyton that the 4% Rule was "never meant to be an autopilot guide to sustainable spending over 30 years."  In fact in the second video, Mr. Guyton discusses his "decision rules" to adjust the 4% Rule or other safe withdrawal rate approaches.  As explained by Dr. Pfau, "Guyton’s idea was to create guardrails on spending: cut spending by 10% if the current withdrawal rate (this year’s withdrawal divided by this year’s portfolio balance) increases by 20% from its initial level, and increase spending by 10% when the current withdrawal rate falls by more than 20% from its initial level."

I would caution retirees to think twice about using Guyton's decision rules to determine their retirement spending budget.  As is clearly shown in the run out tabs in the spending spreadsheets in this website, if your goal is to spend most of your accumulated assets by the end of the expected payout period, your spending budget should increase significantly when measured as a percentage of your accumulated savings as you age.   For example if you have no annuity income and you use the assumptions recommended in this website,  your spending budget at age 80 divided by your projected accumulated savings at age 80 may be 75% higher than your spending budget at age 65 divided by your projected accumulated savings at age 65.  Therefore, application of the Guyton decision rules (with spending cuts adopted when the withdrawal rate for a year increases by more than 20% over the initial withdrawal rate) will likely result in unwanted spending cuts, all things being equal. 

The chart below compares annual spending budgets under the Guyton decision rules with the Actuarial Approach set forth in this website for a 65-year old Male retiree with $600,000 in accumulated savings at retirement, no annuity income and a desire to leave $10,000 in assets at the end of the expected payout period (age 95 or age plus life expectancy if later).  Accumulated assets are assumed to earn 5% each year, inflation is assumed to be 3% per annum and the retiree is assumed to spend exactly the spending budget produced under the relevant approach each year.  For comparison purposes, assume also that the Guyton decision rules start with the same 4.33% withdrawal at age 65 as under the Actuarial Approach and therefore trigger a 10% spending cut whenever the withdrawal rate for a future year equals or exceeds 5.20% (1.2 X 4.33%).

At age 95, assets under the Guyton approach are projected under the assumptions discussed above to be $567,754 as compared with $84,568 under the Actuarial Approach.  While the large amount left to heirs in this example under the Guyton approach may be appreciated by the retiree's heirs, it may not be what the retiree intended. 

(click to enlarge)